================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1999
-----------------
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from____________ to __________
Commission file number 0-8527
-------
DIALYSIS CORPORATION OF AMERICA
------------------------------------------------
(Name of small business issuer in its charter)
FLORIDA 59-1757642
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
27 MILLER AVENUE, LEMOYNE, PENNSYLVANIA 17043
- ---------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (717) 730-6164
--------------
Securities registered under Section 12(b) of the Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Title of each class
-------------------
Common Stock, $.01 par value
Common Stock Purchase Warrants
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant computed by reference to the closing price at which the stock
was sold on March 15, 2000 was approximately $5,716,000.
As of March 15, 1999, the Company had 3,686,844 outstanding shares of
its common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporating information by reference from the Information
Statement in connection with the Registrant's Annual Meeting of Shareholders
anticipated to be on May 24, 2000.
Registrant's Registration Statement on Form SB-2 dated December 22,
1995, as amended February 9, 1996, April 2, 1996 and April 15, 1996,
Registration No. 33-80877-A Part II, Item 27, Exhibits.
Registrant's Annual Report, Form 10-K for the three years ended
December 31, 1998, Par IV, Exhibits.
Annual Reports for Registrant's Parent, Medicore, Inc., Forms 10-K for
the year ended December 31, 1994, Part IV, Exhibits.
================================================================================
<PAGE>
DIALYSIS CORPORATION OF AMERICA
Index to Annual Report on Form 10-K
Year Ended December 31, 1999
Page
----
PART I
Item 1. Business.......................................................... 1
Item 2. Properties........................................................ 19
Item 3. Legal Proceedings................................................. 20
Item 4. Submission of Matters to a Vote of Security Holders............... 20
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters........................................................... 22
Item 6. Selected Financial Data........................................... 23
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 24
Item 7A. Quantitative and Qualitative Disclosure About Market Risk......... 29
Item 8. Financial Statements and Supplementary Data....................... 29
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................. 30
PART III
Item 10. Directors and Executive Officers of the Registrant................ 31
Item 11. Executive Compensation............................................ 31
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 31
Item 13. Certain Relationships and Related Transactions.................... 32
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K... 33
<PAGE>
PART I
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING INFORMATION
The statements contained in this Annual Report on Form 10-K that are
not historical are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 ("Securities Act"), and Section 21E of the
Securities Exchange Act of the 1934. The Private Securities Litigation Reform
Act of 1995 (the "Reform Act") contains certain safe harbors for forward-looking
statements. Certain of the forward-looking statements include management's
expectations, intentions, beliefs and strategies regarding our future growth and
operations, the character and development of the dialysis industry, anticipated
revenues, our need for and sources of funding for expansion opportunities and
construction, expenditures, costs and income, our proposed sale of our
operations to our parent, Medicore, Inc. ("Medicore" or "parent") and our
potential merger with MainStreet IPO.com Inc. ("MainStreet"), and similar
expressions concerning matters that are not considered historical facts.
Forward-looking statements also include our statements regarding liquidity,
anticipated cash needs and availability, and anticipated expense levels in Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations." Such forward-looking statements are subject to substantial risks
and uncertainties that could cause actual results to materially differ from
those expressed in the statements, including the general economic, market and
business conditions, opportunities pursued or not pursued, competition, changes
in federal and state laws or regulations affecting the Company, shareholder
approval of our proposed sale of operations to our parent and merger with
MainStreet, and other factors discussed periodically in our filings. Many of the
foregoing factors are beyond our control. Among the factors that could cause
actual results to differ materially are the factors detailed in the risks
discussed in the "Risk Factors" section included in our registration statements,
one on Form SB-2, as filed with the Securities and Exchange Commission
("Commission") (effective on April 17, 1996), and a second filed with the
Commission on Form S-3 (effective July 1, 1999). Accordingly, readers are
cautioned not to place undue reliance on such forward-looking statements, which
speak only as of the date made and which we undertake no obligation to revise to
reflect events after the date made.
ITEM 1. BUSINESS
HISTORICAL
Dialysis Corporation of America ("DCA" or the "Company"), a Florida
corporation organized in 1976, develops and operates outpatient kidney dialysis
centers that provide quality dialysis and ancillary services to patients
suffering from chronic kidney failure, generally referred to as end stage renal
disease ("ESRD"). We became a public company in 1977, went private in 1979,
selling all but one of our centers through 1989. We began construction of new
centers in 1995, and in 1996 once again became a public company. In 1997, we
sold our Florida dialysis operations, which included an acute care inpatient
dialysis services agreement with a Florida hospital. DCA currently operates six
outpatient dialysis facilities, four facilities in Pennsylvania located in
Lemoyne, Wellsboro, Carlisle and Chambersburg, through our wholly owned
subsidiaries, Dialysis Services of Pa., Inc. - Lemoyne, Dialysis Services of
Pa., Inc. - Wellsboro, and our 80% owned subsidiaries, Dialysis Services of
Pa., Inc. - Carlisle, and Dialysis Services of Pa., Inc. - Chambersburg, and
two dialysis facilities in New Jersey operated through our 80% owned
subsidiaries, Dialysis Services of NJ., Inc. - Manahawkin and DCA of Vineland,
LLC. The Company treats Method II homecare patients through our subsidiary,
DCA Medical Services, Inc.. Additional new facilities are anticipated,
currently through construction and development of new dialysis centers as
opposed to acquisition.
<PAGE>
GENERAL
Management believes the Company distinguishes itself on the basis of
quality patient care. We currently provide outpatient dialysis services through
our six modern outpatient facilities to approximately 170 patients in
Pennsylvania and New Jersey. For the year ended December 31, 1999, we performed
approximately 24,300 dialysis treatments, of which approximately 19,500 were
outpatient treatments, approximately 2,700 were homecare patients, and
approximately 2,100 represented inpatient dialysis treatments. Our facilities
are designed for a maximum of 86 stations to render outpatient dialysis
treatment and training of home dialysis patients.
Our inpatient dialysis treatments are conducted under contractual
relationships currently with three hospitals located in areas serviced by three
of our outpatient dialysis subsidiaries. Homecare, sometimes referred to as
Method II home patient treatment, requires the Company to provide equipment and
supplies, training, patient monitoring and follow-up assistance to patients who
are able to perform their treatments at home.
Our future growth depends primarily on the availability of suitable
dialysis centers for acquisition or development in appropriate and acceptable
areas, and its ability to develop these new potential dialysis centers at costs
within our budget while competing with larger companies, some of which are
public companies or divisions of public companies with much greater personnel
and financial resources who have a significant advantage in acquiring and/or
developing facilities in areas targeted by us. We opened our fifth center in
Chambersburg, Pennsylvania in January, 1999 and our sixth center in Vineland,
New Jersey in February, 2000. Additionally, there is intense competition for
retaining qualified nephrologists, who normally are a substantial if not the
sole source of patient referrals and are responsible for the supervision of the
dialysis centers, and in finding nursing and technical staff at reasonable
rates.
Our medical service revenues are derived primarily from four sources:
(i) outpatient hemodialysis services (50% of medical services revenues for 1999
and 52% for 1998); (ii) home peritoneal dialysis services, including Method II
services (9% of medical services revenues for 1999 and 11% for 1998); (iii)
inpatient hemodialysis services for acute patient care provided through
agreements with hospitals and other healthcare entities (10% of medical services
revenues for 1999 and 11% for 1998); and (iv) ancillary services associated with
dialysis treatments, primarily certain tests and the administration of
erythropoietin ("EPO"), a bio-engineered protein that stimulates the production
of red blood cells, since a deteriorating kidney loses its ability to regulate
red blood cell count, resulting in anemia (31% of medical services revenue for
1999 and 26% for 1998). Dialysis is an ongoing and necessary therapy to sustain
life for kidney dialysis patients and utilization of the Company's services is
substantially predictable. ESRD patients normally receive 156 dialysis
treatments each year. For each of the two years ended December 31, 1998 and
1999, approximately 74% of the Company's revenues were derived from Medicare
reimbursement.
Essential to our operations and income is Medicare reimbursement which
is a fixed rate determined by the Health Care Financing Administration ("HCFA")
of the Department of Health and Human Services ("HHS"). The level of our
revenues and profitability may be adversely affected by future legislation that
could result in rate cuts. Additionally, the Company's operating costs tend to
increase over the years without any comparable increases, if any, in the
prescribed dialysis treatment
2
<PAGE>
rates, which usually remain fixed and have decreased over the years. There also
may be reductions in commercial third-party reimbursement rates. See "Operations
- - Medicare Reimbursement." The inpatient dialysis service agreements for
treating acute kidney disease are not subject to government fixed rates, but
rather are negotiated with the hospitals, and typically the rates are higher on
a per treatment basis. Our inpatient treatments have accounted for approximately
10% and 11% of our revenues for the years ended December 31, 1999 and 1998,
respectively.
IMPORTANT DEVELOPMENTS
On October 20, 1999, we entered into an Asset Purchase Agreement with
our parent and Dialysis Acquisition Corp. ("Buyer"), a wholly-owned subsidiary
of our parent, to sell our operations to Buyer in conjunction with a merger with
MainStreet through its wholly-owned subsidiary, MainStreet Acquisition, Inc.,
pursuant to a Merger Agreement dated October 20, 1999 between and among the
parties. The result of these proposed transactions would be that our dialysis
operations, instead of being 65% owned by our parent, as they currently are,
would be 100% owned by our parent, and the simultaneous merger would result in
you, as DCA shareholders, becoming shareholders of MainStreet, which would then
be a public company, with its shares anticipated to be trading on the Nasdaq
SmallCap Market. These proposed transactions are subject to approval of our
public shareholders. Medicore (65.4% ownership) and the officers and directors
of our Company and Medicore (approximately 2% ownership, exclusive of options
and warrants) will not be voting their shares. In order to issue its shares to
you as DCA shareholders to have you approve both proposed transactions,
MainStreet filed a registration statement on Form S-4 in conjunction with our
proxy statement with the Securities and Exchange Commission.
MainStreet is a private company with no operating history which has
established a website, www.MainStreetIPO.com, for companies to effect
self-underwritten offerings, direct public offerings, of their securities
through the process of a "Dutch Auction" for a flat fee. A Dutch Auction allows
investors to bid for the offered securities at prices and amounts the investors
believe are worth purchasing. Certain of the shareholders of MainStreet own a
corporation called CEO Letter.com Inc., which, assuming completion of the
proposed transactions, will be contributed to and which CEO Letter will become a
wholly-owned subsidiary of MainStreet. CEO Letter, also with no operational
history, has a website which, for a fee, will provide chief executive officers
of public companies with a forum to discuss their companies with potential
Internet investors.
Both boards of directors of MainStreet and our Company have approved
the two proposals, but our board, due to the conflicts that exist in the
proposed transactions, in particular, the parent to have 100% of our dialysis
operations as opposed to its current 65%, and the commonality of officers and
directors among DCA and Medicore, and Thomas K. Langbein, Chairman and CEO of
DCA and Medicore, President of Medicore, and sole owner and principal of Todd &
Company, Inc., registered with the Commission as a broker-dealer and a member of
the NASD, with Todd having an agreement with MainStreet to be recommended as an
underwriter or selling group member of those companies which want to effect
their public offerings through an underwriter as opposed to a direct public
offering. Other related transactions which preclude our board from making any
recommendations to shareholders include Medicore's recent investment in and loan
to the Linux Global Partners, a private holding company investing in Linux
software companies of which MainStreet and Linux are joint venturing a website,
the same as MainStreet's website, for direct public offerings, which will be for
Linux companies invested in by the Linux Global Partners. Mr. Langbein has
recently become a director of Linux Global Partners.
You should understand there are substantial risks in the proposed
merger with MainStreet. You as public shareholders of our Company, assuming you
approve the proposed transactions, would be relinquishing an approximately 33%
interest in our Company that has over $9,000,000 in assets and approximately
$5,900,00 in revenues, to receive approximately 10% of MainStreet, a company
with no operating history, approximately $285,000 in assets, and no revenues.
3
<PAGE>
The board's basis for its approval of the sale of assets and merger was
its recognition of the slow and sporadic growth of our dialysis operations over
the last two decades, and thereby shareholder value has been slow. Bart
Pelstring, a director of the Company and recently retired President, has worked
to build the management team and foundation for our future growth, with Stephen
W. Everett now assuming the post of President. With Mr. Everett as our new
President, business development and strategy may become more aggressive, but
there is no assurance growth, no less more rapid growth, will occur, and if so,
as has been past experience, although revenues increased, since 1989 we have
experienced operational losses, thereby reflecting continued languishing of
shareholder value. The losses occur due to construction of our new dialysis
centers, which are in the development stage and generate losses for at least 12
months. Some do not reach a sufficient patient base to provide and sustain
earnings for longer periods. The Internet industry has reflected a more rapid
growth, which could provide greater shareholder value. However, many Internet
companies, although trading at high stock prices, have experienced losses, and
MainStreet has not even commenced operations. There is no assurance MainStreet
will commence operations, or if so, the extent of its revenues; and with little
management experience, there can be no assurance MainStreet will be profitable.
We anticipate calling a special meeting of DCA shareholders to consider
and vote upon the proposals, with each DCA shareholder to receive the final
proxy statement and proxy to vote on the proposals, which proxy statement is
included in the MainStreet registration statement on Form S-4. However, no
solicitations of proxies for a special meeting of our shareholders may commence
until the Commission declares MainStreet's registration statement effective.
MainStreet and our Company have recently received extensive comments
covering the MainStreet registration statement, which includes our proxy
statement. Among the many issues that require response to the staff of the
Commission was the position of the staff that MainStreet's proposed operations
come within the purview of broker-dealer operations as contemplated within the
regulatory framework of the Securities Exchange Act of 1934 and the rules under
that Act. MainStreet is in discussions and communications with the staff, and we
are reviewing the staff comments and evaluating the circumstances and responses.
There is no assurance as to the extent of time that it will take for MainStreet
to resolve its issues with the Commission, nor the extent of time that it will
take MainStreet and ourselves to respond to the staff's comments, what further
comments there may be, and the ultimate ability and timing of having the
Commission declare the MainStreet registration effective in order to submit the
proxy statement/prospectus relating to the proposed transactions to you for your
consideration.
DIALYSIS INDUSTRY
Kidneys generally act as a filter removing harmful substances and
excess water from the blood, enabling the body to maintain proper and healthy
balances of chemicals and water. Chronic kidney failure, or End Stage Renal
Disease ("ESRD") which results from chemical imbalance and buildup of toxic
chemicals, is a state of kidney disease characterized by advanced irreversible
renal impairment.
4
<PAGE>
ESRD is a likely consequence of complications resulting from diabetes,
hypertension, advanced age, and specific hereditary, cystic and urological
diseases. ESRD patients, in order to survive, must obtain a kidney transplant,
which procedure is limited due to lack of suitable kidney donors and the
incidence of rejection of transplanted organs, or obtain regular dialysis
treatment for the rest of their lives.
Based upon information published by HCFA, the number of ESRD patients
requiring dialysis treatments in the United States continues to grow and is
thought to be attributable primarily to the aging of the population and greater
patient longevity as a result of improved dialysis technology. The historical
annual growth rate of ESRD patients requiring dialysis services is approximately
8% from approximately 85,000 patients in 1985 to over 250,000 patients in 1996.
ESRD TREATMENT OPTIONS
Treatment options for ESRD patients include (1) hemodialysis, performed
either at (i) an outpatient facility, or (ii) inpatient hospital facility, or
(iii) the patient's home; (2) peritoneal dialysis, either continuous ambulatory
peritoneal dialysis ("CAPD") or continuous cycling peritoneal dialysis ("CCPD");
and/or (3) kidney transplant. The significant portion of ESRD patients receive
treatments at non-hospital owned outpatient dialysis facilities (according to
HCFA, approximately 86%) with the remaining patients treated at home through
hemodialysis or peritoneal dialysis. Patients treated at home are monitored by a
designated outpatient facility.
The most prevalent form of treatment for ESRD patients is hemodialysis,
which involves the use of an artificial kidney, known as a dialyzer, to perform
the function of removing toxins and excess fluids from the bloodstream. This is
accomplished with a dialysis machine, a complex blood filtering device which
takes the place of certain functions of the kidney and which machine also
controls external blood flow and monitors the toxic and fluid removal process.
The dialyzer has two separate chambers divided by a semi-permeable membrane, and
at the same time the blood circulates through one chamber, a dialyzer fluid is
circulated through the other chamber. The toxins and excess fluid pass through
the membrane into the dialysis fluid. On the average, patients usually receive
three treatments per week with each treatment taking three to five hours.
Dialysis treatments are performed by teams of licensed nurses and trained
technicians pursuant to the staff physician's instructions.
Home hemodialysis treatment requires the patient to be medically
suitable and have a qualified assistant. Additionally, home hemodialysis
requires training for both the patient and the assistant, which usually takes
four to eight weeks. DCA does not currently provide home hemodialysis
(non-peritoneal) services. The use of conventional home hemodialysis has
declined and is minimal due to the patient's suitability and lifestyle, the need
for the presence of a partner and a dialysis machine at home, and the higher
expense involved over CAPD.
A second home treatment for ESRD patients is peritoneal dialysis. There
are several variations of peritoneal dialysis, the most common being CAPD and
CCPD. All forms of peritoneal dialysis use the patient's peritoneal (abdominal)
cavity to eliminate fluid and toxins from the patient. CAPD utilizes dialysis
solution infused manually into the patient's peritoneal cavity through a
surgically-placed catheter. The solution is allowed to remain in the abdominal
cavity for a three to five hour period and is then drained. The cycle is then
repeated. CCPD is performed in a manner similar to CAPD, but utilizes a
mechanical device to cycle dialysis solution while the patient is sleeping.
Peritoneal dialysis is the third most common form of ESRD therapy following
center hemodialysis and renal transplant.
5
<PAGE>
The third modality for patients with ESRD is kidney transplantation.
While this is the most desirable form of therapeutic intervention, the scarcity
of suitable donors and possibility of donor rejection limits the availability of
this surgical procedure as a treatment option.
BUSINESS STRATEGY
DCA has 23 years' experience in developing and operating dialysis
treatment facilities. Our first priority is top quality patient care. We intend
to continue to establish alliances with physicians and hospitals and to attempt
to initiate dialysis service arrangements with nursing homes and managed care
organizations, and to continue to emphasize our high quality patient care. Our
smaller size allows us to focus on each patient's individual needs while
remaining sensitive to the physicians' professional concerns.
We continue to actively seek and negotiate with physicians and others
to establish new outpatient dialysis facilities. We have entered into agreements
and purchased land for construction of a new facility in Georgia. We are
preparing agreements for a new facility in Ohio, and we are currently in
different phases of negotiations with 10 physicians for potential new facilities
in seven of the eastern states.
SAME CENTER GROWTH
We endeavor to increase same center growth by adding quality staff and
management and attracting new patients to our existing facilities. We seek to
accomplish this objective by rendering high caliber patient care in convenient,
safe and serene conditions for everyone involved. We believe that we have
existing adequate space and stations within our facilities to accommodate
greater patient volume and maximize our treatment potential.
ACQUISITION AND DEVELOPMENT OF FACILITIES
One of the primary elements in acquiring or developing facilities is
locating an area with an existing patient base under the current treatment of a
local nephrologist, since the facility is primarily going to serve such
patients. Other considerations in evaluating a proposed acquisition or
development of a dialysis facility are the availability and cost of qualified
and skilled personnel, particularly nursing and technical staff, the size and
condition of the facility and its equipment, the atmosphere for the patients,
the area's demographics and population growth estimates, state regulation of
dialysis and healthcare services, and the existence of competitive factors such
as hospital or proprietary non-hospital owned and existing outpatient dialysis
facilities within reasonable proximity to the proposed center.
Expansion of our operations is being approached presently through the
development of our own dialysis facilities. Acquisition of existing outpatient
dialysis centers, which we have not done, is a faster but much more costly means
of growth. The primary reason of physicians for the sale or development of
independently owned centers is the avoidance of administrative and financial
responsibilities, freeing their time to devote to their professional practice.
Other motivating forces are the physician's desire to be part of a larger public
organization allowing for economies of scale and the ability to realize a return
on their investment if they take an interest in the dialysis entity.
To construct and develop a new facility ready for operations may take
an average of four to six months, and approximately 12 months or longer to
generate income, all of which are subject to location,
6
<PAGE>
size and competitive elements. Three of our more recent centers, Carlisle,
Pennsylvania and Manahawkin and Vineland in New Jersey, are in the developmental
stages since they have not reached the point where the patient base is
sufficient to generate and sustain earnings, and the Carlisle and Manahawkin
subsidiaries have been operating in excess of 12 months. Construction of a 15
station facility may cost in a range of $600,000 to $750,000 depending on
location, size and related services to be provided by the proposed facility.
Acquisition of existing facilities is substantially more expensive based upon
the number of patients, location, competition, nature of facility and
negotiation. Any significant expansion, whether through acquisition or
development of new facilities, is dependent upon existing funds or financing
from other sources. To date, no acquisitions have been made and should such
acquisition opportunities arise, there is no assurance that we would have
available or be able to raise the necessary financing to pursue or complete such
an acquisition.
INPATIENT SERVICES
Management is also seeking to increase acute dialysis care contracts
with hospitals for inpatient dialysis services. These contracts are sought with
hospitals in areas serviced by its facilities. Hospitals are willing to enter
into such inpatient care arrangements to eliminate the administrative burdens of
providing dialysis services to their patients as well as the expense involved in
maintaining dialysis equipment, supplies and personnel. It is simpler for the
hospital to engage an independent party with the expertise and the knowledge,
such as DCA, to provide the inpatient dialysis treatments. We believe that these
arrangements are beneficial to our operations, since the contract rates are
individually negotiated with each hospital and are not fixed by government
regulation as is the case with Medicare reimbursement fees for ESRD patient
treatment.
There is no certainty as to when any new centers or service contracts
will be implemented, or the number of stations, or patient treatments such may
involve, or if such will ultimately be profitable. There is no assurance that we
will be able to enter into favorable relationships with physicians who would
become medical directors of such proposed dialysis facilities, or that the
Company will be able to acquire or develop any new dialysis centers within a
favorable geographic area. Newly established dialysis centers, although
contributing to increased revenues, also adversely affect results of operations
due to start-up costs and expenses with a smaller and slower developing patient
base. See "Business Strategy," "Operations" and "Competition" of Item 1,
"Business," and Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
OPERATIONS
LOCATION, CAPACITY AND USE OF FACILITIES
DCA operates six outpatient dialysis facilities in Pennsylvania and New
Jersey with a total designed capacity of 86 licensed stations. The Company owns
and operates those centers through its subsidiaries, four of which are 80% owned
and two are wholly-owned. The Lemoyne, Pennsylvania dialysis facility is located
on property owned by the Company and leased to that subsidiary. See Item 2,
"Properties."
DCA also provides acute care inpatient dialysis services to three
hospitals in areas serviced by three of our six dialysis facilities and is in
the process of negotiating additional contracts in the areas surrounding its
other facilities and in tandem with development of future proposed sites. Each
of our
7
<PAGE>
dialysis facilities provides training, supplies and on-call support services for
home peritoneal patients. See "Dialysis Industry" above.
The table below indicates when each subsidiary commenced operations and
the approximate number of patient treatments for the periods indicated.
<TABLE>
<CAPTION>
Dialysis Treatments
-------------------
Year Ended
December 31,
Commencement ------------
Subsidiary and Location of Operations 1999 1998
- ----------------------- ------------- ---- ----
<S> <C> <C> <C>
Dialysis Services of PA., Inc. - Lemoyne June, 1995 7,600 7,500
Dialysis Services of PA., Inc. - Wellsboro September, 1995 3,000 3,600
Dialysis Services of PA., Inc. - Carlisle September, 1997 3,000 3,500
Dialysis Services of NJ, Inc. - Manahawkin July, 1998 1,300 250 (1/2 yr.)
Dialysis Services of PA., Inc. - Chambersburg January, 1999 2,900 --
DCA of Vineland, LLC February, 2000 -- --
</TABLE>
The Company estimates that on average its centers were operating at
approximately 56% of capacity as of December 31, 1999, based on the assumption
that a dialysis center is able to provide up to three treatments a day per
station, six days a week. We believe we are able to increase the number of
dialysis treatments at our centers without making additional capital
expenditures.
OPERATIONS OF DIALYSIS FACILITIES
DCA's dialysis facilities are designed specifically for outpatient
hemodialysis and generally contain, in addition to space for dialysis
treatments, a nurses' station, a patient weigh-in area, a supply room, water
treatment space used to purify the water used in hemodialysis treatments, a
dialyzer reprocessing room (where, with both the patient's and physician's
consent, the patient's dialyzer is sterilized for reuse), staff work area,
offices and a staff lounge. Our facilities also have a designated area for
training patients in home dialysis. Each facility also offers amenities for the
patients, such as a color television with headsets for each dialysis station, to
ensure the patients are comfortable and relaxed.
DCA maintains a team of expert dialysis specialists to provide for the
individual needs of each patient. In accordance with participation requirements
under the Medicare ESRD program, each facility retains a medical director
qualified and experienced in the practice of nephrology and the administration
of a renal dialysis facility. See "Physician Relationships" below. Each facility
is overseen by a nurse administrator who supervises the daily operations and the
staff, which consists of registered nurses, licensed practical nurses, patient
care technicians, a part-time social worker to assist the patient and family to
adjust to dialysis treatment and to provide help in financial assistance and
planning, and a part-time registered dietitian. These individuals supervise the
patient's needs and treatments. See "Employees" below. The Company must continue
to attract and retain skilled nurses and other staff, competition for whom is
intense.
The Company's facilities offer high-efficiency and conventional
hemodialysis, which, in our experience, provides the most viable treatment for
most patients. We consider our dialysis equipment to be both modern and
efficient, providing state of the art treatment in a safe and comfortable
environment. In 1999, we acquired an additional 32 dialysis machines which are
more advanced and include better
8
<PAGE>
safety features and updated technology. The addition of the improved equipment
enhances our ability to provide more efficient treatment.
Our facilities also offer home dialysis (other than hemodialysis),
primarily CAPD and CCPD and Method II. Training programs for CAPD or CCPD
generally encompass two to three weeks at each facility, and such training is
conducted by the facility's home training nurse. After the patient completes
training, they are able to perform treatment at home with equipment and supplies
provided by the Company.
INPATIENT DIALYSIS SERVICES
The Company presently provides inpatient dialysis services to three
hospitals in Pennsylvania under agreements with our subsidiary in the area. Each
agreement is for a one-year term with automatic one-year renewal terms, subject
to termination by notice of either party. Inpatient services are typically
necessary for patients with acute kidney failure resulting from trauma or
similar causes, patients in the early stages of ESRD, and ESRD patients who
require hospitalization for other reasons.
ANCILLARY SERVICES
Our dialysis facilities provide certain ancillary services to ESRD
patients, including the administration of EPO upon a physician's prescription.
EPO is a bio-engineered protein which stimulates the production of red blood
cells and is used in connection with dialysis to treat anemia, a medical
complication frequently experienced by ESRD patients. EPO decreases the
necessity for blood transfusions in ESRD patients. Other ancillary services that
we provide to our patients include electrocardiograms and blood transfusions,
all of which are separately reimbursed by Medicare. See "Medicare Reimbursement"
below.
PHYSICIAN RELATIONSHIPS
An integral element to the success of a facility is its association
with area nephrologists. A dialysis patient generally seeks treatment at a
facility near the patient's home and where such patient's nephrologist has
established its practice. Consequently, DCA relies on its ability to develop
affiliations with area nephrologists who may provide additional patients and
quality dialysis care.
The conditions of a facility's participation in the Medicare ESRD
program mandate that treatment at a dialysis facility be under the general
supervision of a medical director who is a physician. We retain by written
agreement qualified physicians or groups of qualified physicians to serve as
medical directors for each of our facilities. Generally, the medical directors
are board eligible or board certified in internal medicine by a professional
board specializing in nephrology and have had at least 12 months of experience
or training in the care of dialysis patients at ESRD facilities. The medical
directors are typically a significant source of referrals to the particular
center served. Our dialysis centers are operated through subsidiaries, either
corporations or limited liability companies. The medical directors of four of
our six centers have acquired a 20% ownership interest in the centers they
service. We make every effort to comply with federal and state regulations
concerning our relationship with the physicians and our medical directors
treating patients at our facilities (see "Government Regulation" below) and we
know of no limitations on physician ownership in our subsidiaries.
Agreements with medical directors are usually for a term of five years
or more with renewal provisions. Each agreement specifies the duties,
responsibilities and compensation of the medical
9
<PAGE>
director. Usually, physician's fees for services are billed to the government
payment authority on a direct basis and paid directly to the physician or the
professional corporation which acts as the medical director for the facility.
Under each agreement, the medical director or professional association maintains
his, her or its own medical malpractice insurance. The agreements also provide
for non-competition in a limited geographic area surrounding that particular
dialysis center during the term of the agreement and upon termination for a
limited period. However, the agreements do not prohibit physicians providing
services at our facility from providing direct patient care services at other
locations; and consistent with the federal and state law, such agreements do not
require a physician to refer patients to our dialysis centers.
The Company's ability to establish a dialysis facility in a particular
area is significantly geared to the availability of a qualified physician or
nephrologist with an existing patient base to serve as the medical director. The
loss of a medical director who could not be readily replaced would have a
material adverse effect on the operations of that facility and the Company.
Compensation of medical directors is separately negotiated for each facility and
generally depends on competitive factors such as the local market, the
physician's qualifications and the size of the facility.
QUALITY ASSURANCE
DCA implements a quality assurance program to maintain and improve the
quality of dialysis treatment and care we provide to our patients in every
facility. Quality assurance activities involve the ongoing examination of care
provided, the identification of deficiencies in that care and any necessary
improvements of the quality of care. Specifically, this program requires each
center's staff, including its medical director and/or nurse administrator to
regularly review quality assurance data, whether related to dialysis treatment
services, equipment, technical and environmental improvements, and staff-patient
and personnel relationships. These evaluations are in addition to assuring
regulatory compliance with HCFA and the Occupational Safety and Health
Administration. Our manager of compliance, who is a registered nurse, oversees
this program in addition to ensuring that the Company meets federal and state
compliance requirements for dialysis centers. See "Government Regulation" below.
PATIENT REVENUES
A substantial amount of the fees for outpatient dialysis treatments are
funded under the ESRD Program established by the federal government under the
Social Security Act, and administered in accordance with rates set by HCFA. It
has been reported by HCFA that 92% of all dialysis patients were covered by
Medicare. The balance of the outpatient charges are paid by private payors
including the patient's medical insurance, private funds or state Medicaid
plans. Pennsylvania and New Jersey, presently the states in which we operate,
provide Medicaid or comparable benefits to qualified recipients to supplement
their Medicare coverage.
Under the ESRD Program, payments for dialysis services are determined
pursuant to Part B of the Medicare Act which presently pays 80% of the allowable
charges for each dialysis treatment furnished to patients. The maximum payments
vary based on the geographic location of the center. The remaining 20% may be
paid by Medicaid if the patient is eligible, from private insurance funds or the
patient's personal funds. Medicare and Medicaid programs are subject to
regulatory changes, statutory limitations and government funding restrictions,
which may adversely affect our revenues and dialysis services payments. See
"Medicare Reimbursement" below.
10
<PAGE>
The inpatient dialysis services are paid for by the hospital pursuant
to contractual pre-determined fees for the different dialysis treatments.
Inpatient treatments accounted for approximately 10% and 11% of our revenues for
the years ended December 31, 1999 and 1998, respectively.
MEDICARE REIMBURSEMENT
DCA is reimbursed primarily from third party payors including Medicaid,
commercial insurance companies, but substantially by Medicare under a
prospective reimbursement system for chronic dialysis services. Each of our
dialysis facilities is certified to participate in the Medicare program. Under
that Medicare system, the reimbursement rates are fixed in advance and limit the
allowable charge per treatment, but provides us with predictable and recurring
per treatment revenues and allows us to retain any profit earned. An established
composite rate set by HCFA governs the Medicare reimbursement available for a
designated group of dialysis services, including dialysis treatments, supplies
used for such treatments, certain laboratory tests and medications. HCFA
eliminated routine Medicare coverage for such tests as nerve conduction studies,
electrocardiograms, chest x-rays and bone density measurements, and will only
pay for such tests when there is documentation of medical necessity. The
Medicare composite rate is subject to regional differences in wage earnings.
The Company receives reimbursement for outpatient dialysis services
provided to Medicare-eligible patients at rates that are currently between $122
and $124 per treatment, depending upon regional wage variations. The Medicare
reimbursement rate is subject to change by legislation and recommendations by
the Medicare Payment Advisory Commission ("MedPAC"), a commission mandated by
the Balanced Budget Act of 1997 and continuing the work of the Prospective
Payment Assessment Commission ("PROPAC"). An average ESRD reimbursement rate is
$126 per treatment for outpatient dialysis services. The current maximum
composite reimbursement rate is $134 per treatment. In 1998, MedPAC recommended
a 2.7% increase in the amount paid to dialysis facilities for performance of
services. The Balanced Budget Refinement Act of 1999 would increase the
composite rate for payment by 1.2% for dialysis services in the year 2000 and an
additional 1.2% for such services in 2001. Congress is not required to implement
such recommendation and could otherwise increase or decrease the Medicare
reimbursement rate.
Other ancillary services and items are eligible for separate
reimbursement under Medicare and are not part of the composite rate, including
certain drugs such as EPO, the allowable rate of which is currently $10 per 1000
units for amounts in excess of three units per patient per year, and certain
physician-ordered tests provided to dialysis patients. These ancillary services
are not significant sources of income to us compared to reimbursement for actual
treatment. However, the proposal to reduce the reimbursement rate of EPO to $9
per 1,000 units recommended by the Office of Inspector General of HHS and
concurred to by HHS (a similar reduction recommended by the President's proposed
2000 budget) could adversely impact our income from EPO if enacted by Congress.
The Company routinely submits claims monthly and is usually paid by Medicare
within 30 days of the submission.
We are unable to predict what, if any, future changes may occur in the
rate of reimbursement. Any reduction in the Medicare composite reimbursement
rate could have a material adverse effect on our business, revenues and net
earnings.
MEDICAID REIMBURSEMENT
Medicaid programs are state administered programs partially funded by
the federal government. These programs are intended to provide coverage for
patients whose income and assets fall below state
11
<PAGE>
defined levels and who are otherwise uninsured. The programs also serve as
supplemental insurance programs for the Medicare co-insurance portion and
provide certain coverages (e.g., oral medications) that are not covered by
Medicare. State regulations generally follow Medicare reimbursement levels and
coverages without any co-insurance amounts. Certain states, however, require
beneficiaries to pay a monthly share of the cost based upon levels of income or
assets. Pennsylvania has a Medical Assistance Program comparable to Medicaid, as
well as New Jersey, with primary and secondary insurance coverage to those who
qualify. We are a licensed ESRD Medicaid provider in New Jersey and
Pennsylvania.
POTENTIAL LIABILITY AND INSURANCE
Participants in the health care industry are subject to lawsuits based
upon alleged negligence, many of which involve large claims and significant
defense costs. DCA, although involved in chronic and acute kidney dialysis
services for approximately 23 years, has never been subject to any suit relating
to its dialysis operations. We currently have general liability insurance,
including professional and products liability, with coverage limits of $1
million per occurrence and $3 million in the aggregate annually. Our insurance
policies provide coverage on an "occurrence" basis and are subject to annual
renewal. A hypothetical successful claim against us in excess of our insurance
coverage could have a material adverse effect upon our business and results of
operations. The medical directors supervising our dialysis operations and other
physicians practicing at the facilities are required to maintain their own
professional malpractice insurance coverage.
GOVERNMENT REGULATION
GENERAL
Regulation of healthcare facilities, including dialysis, is extensive,
with legislation continually proposed relating to safety, maintenance of
equipment and proper records, quality assurance programs, reimbursement rates,
licensing and other areas of operations. Each of the dialysis facilities must be
certified by HCFA, and we must comply with certain rules and regulations
established by HCFA regarding charges, procedures and policies. Each dialysis
center is also subject to periodic inspections by federal and state agencies to
determine if their operations meet the appropriate regulatory standards. These
requirements have been satisfied by each of our dialysis facilities.
Many states have eliminated the requirement for dialysis centers to
obtain a certificate of need, a condition for regulating the establishment and
expansion of dialysis centers. There are no certificate of need requirements in
Pennsylvania or New Jersey where we are presently operating. In past years, we
have always been able to comply with applicable certificate of need laws.
Our record of compliance with federal, state and local governmental
laws and regulations remains excellent. Regulation of healthcare facilities,
including dialysis centers, is extensive with legislation continually proposed
relating to safety, reimbursement rates, licensing and other areas of
operations. We are unable to predict the scope and effect of any changes in
government regulations, particularly any modifications in the reimbursement rate
for medical services or requirements to obtain certification from HCFA.
Enforcement may also become more stringent adding to compliance costs as well as
potential sanctions.
12
<PAGE>
We regularly review legislative and regulatory changes and developments
and will restructure a business arrangement if we determine such might place our
operations in material noncompliance with such law or regulation. See "Fraud and
Abuse" and "Stark II" below. To date, none of our business arrangements with
physicians, patients or others have been the subject of investigation by any
governmental authority. No assurance can be given, however, that DCA's business
arrangements will not be the subject of a future investigation or prosecution by
a federal or state governmental authority which could result in civil and/or
criminal sanctions.
FRAUD AND ABUSE
Each Year OIG publishes a Fraud and Abuse Civil Plan. For the year
2000, OIG has indicated it plans to concentrate, among other things, on ESRD
reimbursement issues, including oversight of dialysis facilities, separately
billable maintenance dialysis services, and medical appropriateness of tests and
other dialysis-related services. We have reviewed the OIG 2000 Work Plan, and
believe we are in compliance with applicable regulations to be addressed by OIG.
Nevertheless, we will continue to review risk areas inherent to dialysis
treatment and service, and to develop and implement a compliance program. This
program focuses on employee education concerning applicable billing rules,
regulations and insurance carrier interpretations, as well as auditing medical
records to ensure the medical necessity of services provided and billed.
The Social Security Act provides Medicare coverage to most persons
regardless of age or financial condition for dialysis treatments as well as
kidney transplants. The Social Security Act further prohibits, as do many state
laws, the payment of patient referral fees for treatments that are otherwise
paid for by Medicare, Medicaid or similar state programs under the Medicare and
Medicaid Patient and Program Protection Act of 1987, or the "Anti-kickback
Statute." The Anti-kickback Statute and similar state laws impose criminal and
civil sanctions on persons who knowingly and willfully solicit, offer, receive
or pay any remuneration, directly or indirectly, in return for, or to include,
the referral of a patient for treatment, among other things. Included in the
civil penalties is exclusion of the provider from participation in the Medicare
and Medicaid programs. The language of the Anti-kickback Statute has been
construed broadly by the courts. The federal government in 1991, 1992 and late
1999 published regulations that established exceptions, "safe harbors," to the
Anti-kickback Statute for certain business arrangements that would not be deemed
to violate the illegal remuneration provisions of the federal statute. All
conditions of the safe harbor must be satisfied to meet the exception and
immunize the arrangement from prosecution, but failure to satisfy all elements
does not mean the business arrangement violates the illegal remuneration
provision of the statute.
As required by Medicare regulations, each of our dialysis centers is
supervised by a medical director, who is a licensed nephrologist or otherwise
qualified physician. The medical directors are in private practice and are one
of the most important sources of the dialysis center's business, since it is
each physician's patients that primarily utilize the services of the facility.
The compensation of the Company's medical directors is fixed by a Medical
Director Agreement and reflects competitive factors in their respective
location, and the size of the center, and the physician's professional
qualifications. The medical director's fee is fixed in advance for periods of
one to five years and does not take into account the volume of patient
treatments or amounts of referrals to the dialysis center. Four of our
outpatient dialysis centers are owned jointly between the Company and a group of
physicians, who hold a minority position and who also act as the medical
director for those facilities. We attempt to structure our arrangements with our
physicians to comply with the Anti-Kickback Statute. However, many of these
physicians refer patients to our facilities. We believe that the value of the
minority interest represented by stock of our subsidiaries issued to physicians
has been consistent with the fair market
13
<PAGE>
value of assets transferred to, or services performed by such physicians for the
subsidiary, and in certain cases, monetary compensation, and there is no intent
to induce referrals to our facilities. See "Business - Physician Relationships"
above. We have never been challenged under these statutes and believe our
arrangements with our medical directors are in material compliance with
applicable law.
Management believes that the illegal remuneration provisions described
above are primarily directed at abusive practices that increase the utilization
and cost of services covered by governmentally funded programs. The dialysis
services provided by the Company generally cannot, by their very nature, be
over-utilized, since dialysis treatment is not elective and cannot be prescribed
unless there is temporary or permanent kidney failure. Medical necessity is
therefore capable of objective documentation, drastically reducing the
possibility of overutilization. There are safe harbors for certain arrangements.
However, these relationships with medical director ownership of a minority
interest in our facility satisfies many but not all of the criteria for the safe
harbor, and there can be no assurance that these relationships will not subject
us to investigation or prosecution by enforcement agencies. In an effort to
further our position of adhering to the law, we have initiated the development
of a compliance plan and medical chart audits to confirm medical necessity of
referrals.
With respect to our inpatient dialysis services, we provide the
hospital or similar healthcare entity with dialysis services, including
qualified nursing and technical personnel, supplies, equipment and technical
services. In certain instances, medical directors of a DCA facility who have a
minority interest in that facility may refer patients to hospitals with which we
have an inpatient dialysis services arrangement. The federal Anti-kickback
Statute could apply, but we believe our acute inpatient hospital services are in
compliance with the law. See "Stark II" below.
We endeavor in good faith to comply with all governmental regulations.
However, there can be no assurance that we will not be required to change our
practices or experience a material adverse effect as a result of any such
potential challenge. We cannot predict the outcome of the rule-making process or
whether changes in the safe harbor rules will affect our position with respect
to the Anti-kickback Statute, but we do believe we will remain in compliance.
STARK II
The Physician Ownership and Referral Act ("Stark II") was adopted and
incorporated into the Omnibus Budget Reconciliation Act of 1993 and became
effective January 1, 1995. Stark II bans physician referrals, with certain
exceptions, for certain "designated health services" as defined in the statute
to entities in which a physician or an immediate family member has a "financial
relationship" which includes an ownership or investment interest in, or a
compensation arrangement between the physician and the entity. This ban is
subject to several exceptions including personal service arrangements,
employment relationships and group practices meeting specific conditions. If
Stark II is found to be applicable to the facility, the entity is prohibited
from claiming payment for such services under the Medicare or Medicaid programs,
is liable for the refund of amounts received pursuant to prohibited claims, can
be imposed with civil penalties of up to $15,000 per referral and can be
excluded from participation in the Medicare and Medicaid programs. In 1998, HCFA
released proposed rules that interpret the provisions of Stark II and Congress'
legislative intent behind their enactment ("Proposed Rules").
For purposes of Stark II, "designated health services" includes, among
others, clinical laboratory services, durable medical equipment, parenteral and
enteral nutrients, home health services, and inpatient and outpatient hospital
services. Dialysis treatments are not included in the statutory list of
"designated
14
<PAGE>
health services." In the Proposed Rules, HCFA clarified the definitions of
designated health services, delineating what supplies and services are intended
to be included and excepted from each category. In particular, dialysis
equipment, supplies and services were specifically excepted from the definitions
of durable medical equipment, and inpatient and outpatient health services. HCFA
further indicated that the purpose behind the Stark II prohibition on physician
referral is to prevent Medicare program and patient abuse, and that dialysis is
a necessary medical treatment for those with temporary or permanent kidney
failure that is not susceptible to that type of abuse. HCFA additionally
excluded EPO (see "Business - Operations - Ancillary Services" above) from the
definition of outpatient prescription drugs under the same reasoning.
We believe, based upon the Proposed Rules and the industry practice,
that Congress did not intend to include dialysis services and the services and
items provided by the Company incident to dialysis services within the Stark II
prohibitions. There can be no assurance, though, that final Stark II regulations
will adopt such a position. No final rules have been promulgated, however, and
are not expected to be published until the spring or summer of 2000.
If the provisions of Stark II were found to apply to our arrangements
however, we believe that we would be in compliance. We compensate our
nephrologist-physicians as medical directors of its dialysis centers pursuant to
Medical Director Agreements, which we believe meet the exception for personal
service arrangements under Stark II. Non-affiliated physicians who send or treat
their patients at any of our facilities do not receive any compensation from
DCA.
Medical directors of our facilities which hold a minority
investment interest may refer patients to hospitals with which DCA has an acute
inpatient dialysis service arrangement. Stark II may be interpreted to apply to
these types of interests. According to the Proposed Rules, however, acute care
inpatient hospital arrangements for dialysis services are excluded from the
prohibition on physician referrals if the services provided under these
arrangements are rendered under emergency circumstances and are necessary
treatments. We believe that our contractual arrangements with hospitals for
acute care inpatient dialysis services are in compliance with this exception.
If HCFA or any other government entity takes a contrary position in the
Stark II final regulations or otherwise, we may be required to restructure
certain existing compensation or investment agreements with our medical
directors, or, in the alternative, to refuse to accept referrals for designated
health services from certain physicians. That legislation prohibits Medicare or
Medicaid reimbursement of items or services provided pursuant to a prohibited
referral, and imposes substantial civil monetary penalties on facilities which
submit claims for reimbursement. If such were to be the case, we could be
required to repay amounts reimbursed for drugs, equipment and services that HCFA
determines to have been furnished in violation of Stark II, in addition to
substantial civil monetary penalties, which may adversely affect our operations
and future financial results. We believe that if Stark II is interpreted by HCFA
or any other governmental entity to apply to our arrangements, it is possible
that we will be permitted to bring our financial relationships with referring
physicians into material compliance with the provisions of Stark II on a
prospective basis. However, prospective compliance may not eliminate the amounts
or penalties, if any, that might be determined to be owed for past conduct, and
there can be no assurance that such prospective compliance, if permissible,
would not have a material adverse effect on the Company.
15
<PAGE>
HEALTH INSURANCE REFORM ACT
Congress has taken action in recent legislative sessions to modify the
Medicare program for the purpose of reducing the amounts otherwise payable from
the program to healthcare providers, but there are no significant proposed cuts
in dialysis payments. The ESRD program received a five year waiver from
reduction in Medicare outlays to allow for the results of a HCFA project.
However, future legislation or regulations may be enacted that could
significantly modify the ESRD program or substantially reduce the amount paid to
the Company for its services. Further, statutes or regulations may be adopted
which demand additional requirements in order for us to be eligible to
participate in the federal and state payment programs. Any new legislation or
regulations may adversely affect our business operations, as well as its
competitors.
The Health Insurance Portability and Accountability Act of 1996
("HIPAA"), provided for health insurance reforms which included a variety of
provisions important to healthcare providers, such as significant changes to the
Medicare and Medicaid fraud and abuse laws. Some of the fraud and abuse
provisions were effective January 1, 1997. While many of the provisions were
self-implementing, some required further rulemaking by HHS which rules became
effective July 1, 1997. HIPAA established two programs that will coordinate
federal, state and local healthcare fraud and abuse activities, to be known as
the "Fraud and Abuse Control Program" and the "Medicare Integrity Program." The
Fraud and Abuse Control Program will be conducted jointly by HHS and the
Attorney General while the Medicare Integrity Program, which is funded by the
Medicare Hospital Insurance Trust Fund, will enable HHS, the Department of
Justice and the FBI to monitor and review specifically Medicare fraud.
Under these programs, these governmental entities will undertake a
variety of monitoring activities which were previously left to providers to
conduct, including medical utilization and fraud review, cost report audits,
secondary payor determinations, reports of fraud and abuse actions against
providers will be shared as well as encouraged by rewarding whistleblowers with
money collected from civil fines. The Incentive Program for Fraud and Abuse
Information, a new program under HIPAA, began in January, 1999 rewarding
Medicare recipients 10% of the overpayment up to $1,000 for reporting Medicare
fraud and abuse. HIPAA further created several new Health Care Fraud Crimes and
extended their applicability to private health plans; but the Anti-kickback
Statute does not apply to private health plans.
HIPAA also sets forth a program intended to assist providers in
understanding the requirements of the fraud and abuse laws. HIPAA first permits
individuals to petition HHS for written advisory opinions regarding whether an
arrangement gives rise to prohibited remuneration under the federal anti-fraud
abuse laws, constitutes grounds for imposition of civil and criminal sanctions
under the federal anti-fraud and abuse laws or satisfies the requirements of an
existing safe harbor. These opinions are published by HHS. While these opinions
are helpful to gain insight into what is permissible without having a safe
harbor, such opinions will only be binding on HHS and the party receiving the
opinion.
HIPAA increases significantly the civil and criminal penalties for
offenses related to healthcare fraud and abuse. HIPAA increased civil monetary
penalties from $2,000 plus twice the amount for each false claim to $10,000 plus
three times the amount for each false claim. HIPAA expressly prohibits four
practices, namely (1) submitting a claim that the person knows or has reason to
know is for medical items or services that are not medically necessary, (2)
transferring remuneration to Medicare and Medicaid beneficiaries that is likely
to influence such beneficiary to order or receive items or services, (3)
certifying the need for home health services knowing that all of the coverage
requirements have not been met, and (4) engaging in a pattern or practice of
upcoding claims in order to obtain greater
16
<PAGE>
reimbursement. However, HIPA creates a tougher burden of proof for the
government by requiring that the government establish that the person "knew or
should have known" a false or fraudulent claim was presented. The "knew or
should have known" standard is defined to require "deliberate ignorance or
reckless disregard of the truth or falsity of the information," thus merely
negligent conduct or billing errors should not violate the Civil False Claims
Act.
As for criminal penalties, HIPAA adds healthcare fraud, theft,
embezzlement, obstruction of investigations and false statements to the general
federal criminal code with respect to federally funded health programs, thus
subjecting such acts to criminal penalties. Persons convicted of these crimes
face up to 10 years imprisonment and/or fines. Moreover, a court imposing a
sentence on a person convicted of federal healthcare offense may order the
person to forfeit all real or personal property that is derived from the
criminal offense. The Attorney General is also provided with a greatly expanded
subpoena power under HIPAA to investigate fraudulent criminal activities, and
federal prosecutors may utilize asset freezes, injunctive relief and forfeiture
of proceeds to limit fraud during such an investigation.
Although we believe we substantially comply with currently applicable
state and federal laws and regulations and to date has not had any difficulty in
maintaining its licenses or its Medicare and Medicaid authorizations, the
healthcare service industry is and will continue to be subject to substantial
and continually changing regulation at the federal and state levels, and the
scope and effect of such and its impact on our operations cannot be predicted.
No assurance can be given that our activities will not be reviewed or challenged
by regulatory authorities.
Any loss by the Company of its various federal certifications, its
approval as a certified provider under the Medicare or Medicaid programs or its
licenses under the laws of any state or other governmental authority from which
a substantial portion of our revenues are derived or a change resulting from
healthcare reform, a reduction of dialysis reimbursement or a reduction or
complete elimination of coverage for dialysis services would have a material
adverse effect on our business.
ENVIRONMENTAL AND HEALTH REGULATIONS
Our dialysis centers are subject to hazardous waste laws and
non-hazardous medical waste regulation. Most of our waste is non-hazardous. HCFA
requires that all dialysis facilities have a contract with a licensed medical
waste handler for any hazardous waste. We also follow OSHA's Hazardous Waste
Communications Policy, which requires all employees to be knowledgeable of the
presence of and familiar with the use and disposal of hazardous chemicals in the
facility. Medical waste of each facility is handled by licensed local medical
waste sanitation agencies who are primarily responsible for compliance with such
laws.
There are a variety of regulations promulgated under OSHA relating to
employees exposed to blood and other potentially infectious materials requiring
employers, including dialysis centers, to provide protection. We adhere to
OSHA's protective guidelines, including regularly testing employees and patients
for exposure to hepatitis B and providing employees subject to such exposure
with hepatitis B vaccinations on an as-needed basis, protective equipment, a
written exposure control plan and training in infection control and waste
disposal.
17
<PAGE>
OTHER REGULATION
There are also federal and state laws prohibiting anyone from
presenting false claims or fraudulent information for payments by Medicare,
Medicaid and other third-party payors. These laws provide for both criminal and
civil penalties, exclusion from Medicare and Medicaid participation, repayment
of previously collected amounts and other financial penalties under the False
Claims Act. The submission of Medicare cost reports and requests for payment by
dialysis centers are covered by these laws. We believe we have the proper
internal controls and procedures for issuance of accounts and complete cost
reports and payment requests. However, there is no assurance that such reports
and requests are materially accurate and complete and therefore subject to a
challenge under these laws.
Certain states have anti-kickback legislation and laws dealing with
self-referral provisions similar to the federal Anti-kickback Statute and Stark
II. We have no reason to believe that it is not in compliance with such state
laws.
COMPETITION
The dialysis industry is very competitive. There are numerous providers
who have dialysis facilities in the same areas as the Company. Many are owned by
physicians or major corporations which operate dialysis facilities regionally,
nationally and internationally. Our operations are small in comparison with
those corporations. Some of our major competitors are public companies,
including Fresenius Medical Care, Gambro Healthcare, Inc., Renal Care Group,
Inc., Total Renal Care Holdings, Inc., and Everest Healthcare Service Corp. Most
of these companies have substantially greater financial resources, many more
centers, patients and services than DCA, and by virtue of such have a
significant advantage over us in competing for nephrologists and acquisitions of
dialysis facilities in areas and markets we target. Competition for acquisitions
has increased the cost of acquiring existing dialysis facilities. We also face
competition from hospitals that provide dialysis treatments. We have also
experienced competition from admitting physicians of our centers who have opened
their own dialysis facilities.
Competitive factors most important in dialysis treatment are quality of
care and service, convenience of location and pleasantness of the environment.
Another significant competitive factor is the ability to attract and retain
qualified nephrologists. These physicians are a substantial source of patients
for the dialysis centers, are required as medical directors of the dialysis
facility for it to participate in the Medicare ESRD program, and are responsible
for the supervision and operations of the center. Our medical directors usually
are subject to non-compete restrictions within a limited geographic area from
the center they administer. Additionally, there is always substantial
competition for obtaining qualified, competent nurses and technical staff at
reasonable labor costs.
Based upon advances in surgical techniques, immune suppression and
computerized tissue typing, cross-matching of donor cells and donor organ
availability, renal transplantation in lieu of dialysis is becoming a
competitive factor. It is presently the second most commonly used modality in
ESRD therapy. With greater availability of kidney donations, currently the most
limiting factor, renal transplantations could become a more significant
competitive aspect to the dialysis treatments we provide. Although kidney
transplant is a preferred treatment for ESRD, certain patients who have
undergone such transplants have lost their transplant function and returned to
dialysis treatments.
18
<PAGE>
EMPLOYEES
As of March 15, 2000, DCA had 65 full time employees, including nurse
administrators, clinical registered nurse managers, registered nurses, chief
technician, technical specialists, patient care technicians, and clerical
employees. We retain 33 part time employees consisting of registered nurses,
patient care technicians and clerical employees. Occasionally, we utilize
employees on a "per diem" basis to supplement staffing.
We retain eight part-time independent contractors who include the
social workers and dietitians at each facility. These are in addition to the
medical directors, who are independent contractors and who supervise patient
treatment at each facility.
We believe our relationship with our employees is good and we have not
suffered any strikes or work stoppages. None of our employees is represented by
any labor union. We are an equal opportunity employer.
ITEM 2. PROPERTIES
DCA owns two properties, one located in Lemoyne, Pennsylvania and the
second in Easton, Maryland. The Maryland property consists of approximately
7,400 square feet, most of which is leased to a competitor. The lease was
renewed for an additional five years through March 31, 2003. The lease is
guaranteed by the tenant's parent company.
The Lemoyne property of approximately 15,000 square feet houses our
dialysis center of approximately 5,400 square feet, approved for 13 dialysis
stations with space available for expansion. We use approximately 2,500 square
feet for our executive offices. One of our Pennsylvania subsidiaries,
leases this facility from us under a five year lease that commenced December 23,
1998 at an annual rental of $43,088 per annum plus separately metered utilities,
insurance and additional rent of $5,386 per year covering common area
maintenance expenses, with two renewals of five years each at escalating base
rent for each renewal period.
The Easton, Maryland property is subject to two mortgages from
affiliated Maryland banking institutions. The Lemoyne, Pennsylvania property is
also subject to a mortgage from one of the Maryland banking institutions which
holds one of the mortgages on the Easton, Maryland property. As of December 31,
1999, the remaining principal amount of the mortgage on the Lemoyne property was
approximately $125,000 and the first mortgage on the Easton property was
approximately $157,000. Each of these mortgages is under the same terms and
extends through November, 2003, bears interest at 1% over the prime rate, and is
secured by the real property and the Company's personal property at each
respective location. The bank also has a lien on rents due the Company and
security deposits from leases of the properties, and each tenant is required to
sign a tenant subordination agreement as part of its lease with us. Written
approval of the bank is required for all leases, assignments or sublettings,
alterations and improvements and sales of the properties. The Easton, Maryland
property has a second mortgage to secure a three-year loan to our Vineland, New
Jersey subsidiary, for up to $700,000 at an annual interest rate of 8.75%, which
loan we guaranty, and is further secured by that subsidiary's personal property,
exclusive of its dialysis equipment. See Item 7, "Management's Discussions and
Analysis of Financial Condition and Results of Operations" and Note 2 to "Notes
to Consolidated Financial Statements."
19
<PAGE>
DCA also leases space at its Lemoyne, Pennsylvania property to an
unrelated party for its own business activities unrelated to dialysis services.
The lease is for approximately 1,500 square feet through December 31, 2002, at
an aggregate rental of approximately $13,500 per annum.
In addition to our Lemoyne, Pennsylvania facility, we presently have
five other dialysis facilities. Each is leased from unaffiliated parties under
five year leases, all with two renewals of five years each, for space ranging
from 3,500 square feet to 7,000 square feet. The rentals for these facilities
range from $25,000 to $74,000 per annum, some adding utilities, real estate
taxes and costs for casualty insurance premiums. We sublet 1,800 square feet at
our Chambersburg, Pennsylvania facility to the physicians who are our medical
directors at that facility for their medical offices in Chambersburg. The
sublease is on a commercially reasonable basis and is structured to comply with
the safe harbor provisions of the "Anti-kickback Statute." See "Governmental
Regulation - Fraud and Abuse" above.
We recently acquired property in South Georgia for $207,000 and
anticipate commencement of construction of a new facility at that location in
the second quarter of 2000. We are actively pursuing the additional development
of dialysis facilities, one in Ohio, as well as other areas of the country which
would entail the acquisition or lease of additional property.
We construct all of our dialysis facilities, and each is relatively new
with state-of-the-art equipment and facilities. The dialysis stations are
equipped with modern dialysis equipment under a November, 1996 master
lease/purchase agreement with a $1.00 purchase option at the end of the term.
Payments under the various schedules extend through May, 2005. See Note 2 to
"Notes to Consolidated Financial Statements."
None of our dialysis facilities are operating at full capacity. See
"Business - Operations - Location, Capacity and Use of Facilities" above. The
existing dialysis facilities could accommodate greater patient volume,
particularly if we increase hours and/or days of operation without adding
additional dialysis stations or any additional capital expenditures. We also
have the ability and space at each of our facilities to expand to increase
patient volume subject to obtaining appropriate governmental approval.
We maintain executive offices at 27 Miller Street, Suite 2, Lemoyne,
Pennsylvania 17043 as well as with its parent, Medicore ("Medicore" or the
"Parent"), at 2337 West 76th Street, Hialeah, Florida.
ITEM 3. LEGAL PROCEEDINGS
We are not involved in or subject to any material pending legal
actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of our fiscal year
ended December 31, 1999 to a vote of security holders through the solicitation
of proxies or otherwise. Since Medicore owns approximately 65% of our equity,
proxies are not solicited, but rather we provide our shareholders with an
Information Statement and an Annual Report. The Information Statement provides
similar information to shareholders as does a proxy statement, except there is
no solicitation of proxies.
20
<PAGE>
As noted under Item 1, "Business - Important Events," we, together with
MainStreet, prepared a proxy statement/prospectus which is preliminary and has
been included in MainStreet's registration statement filed with the Commission.
The document is not for circulation until all comments of the Commission are
adequately dealt with and MainStreet's registration statement is declared
effective. Extensive comments were received from the staff of the Commission,
including broker-dealer regulatory issues relating to the proposed operations of
MainStreet. There is no assurance when, if at all, the proxy
statement/prospectus will be finalized or declared effective by the Commission.
See Item 1, "Business - Important Information."
21
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock commenced trading on the Nasdaq SmallCap Market on
April 17, 1996, under the symbol "DCAI." The table below indicates the high and
low bid prices for our common stock for the four quarters for the years ended
December 31, 1998 and 1999 as reported by Nasdaq.
BID PRICE
---------
1998* HIGH LOW
---- ---- ---
1st Quarter................... $2.56 $1.31
2nd Quarter................... 1.94 1.25
3rd Quarter................... 1.94 0.88
4th Quarter................... 1.25 0.56
BID PRICE
---------
1999 HIGH LOW
---- ---- ---
1st Quarter................... $1.75 $ .69
2nd Quarter................... 3.30 .56
3rd Quarter................... 4.50 1.94
4th Quarter**................. 6.88 1.34
- ---------------
* The common stock did not trade actively in 1998.
** The price increases may be, in part or primarily, the result of the
announcement during the fourth quarter of the execution of the Merger
Agreement with MainStreet and related agreements.
At March 16, 2000, the high and low sales price of our common stock was
$4.75 and $4.66, respectively.
Bid and asked prices are without adjustments for retail mark-ups,
mark-downs or commissions, and may not necessarily represent actual
transactions.
At March 16, 2000, we had 98 shareholders of record and approximately
765 beneficial owners of our common stock.
We do not anticipate that we will pay dividends in the foreseeable
future. The board of directors intends to retain earnings, if any, for use in
the business. Future dividend policy will be at the discretion of the board of
directors, and will depend on our earnings, capital requirements, financial
condition and other similar relevant factors. We have experienced operational
losses since 1989. See Item 6, "Selected Financial Data," and Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Future events are subject to the proposed merger with MainStreet,
which may result in our shareholders becoming MainStreet shareholders, with the
dialysis operations being wholly-owned (in lieu of 65% owned) by Medicore. There
is no assurance that the proposed merger will be approved or completed. See Item
1, "Business - Important Events."
22
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the five years ended December
31, 1999 is derived from the audited consolidated financial statements of the
Company. The data should be read in conjunction with the consolidated financial
statements, related notes and other financial information included herein.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
(in thousands except per share amounts)
Years Ended December 31,
------------------------------------------------------
1999 1998 1997(1) 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues .................................... $ 5,866 $ 4,004 $ 9,221 $ 4,137 $ 2,668
Net (loss) income ........................... (668) (204) 1,993 (23) (167)
(Loss) earnings per share
Basic ..................................... (.19) (.06) .56 (.01) (.07)
Diluted ................................... (.19) (.06) .55 (.01) (.07)
<CAPTION>
CONSOLIDATED BALANCE SHEET DATA
(in thousands)
December 31,
------------------------------------------------------
1999 1998 1997(1) 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Working capital ............................. $ 4,152 $ 5,115 $ 7,062 $ 4,529 $ 651
Total assets ................................ 9,036 9,349 11,638 7,522 3,972
Intercompany receivable from
Medicore (non-current portion) ............ 105
Long term debt, net of current portion(2).... 870 633 693 585 152
Stockholders' equity ........................ 7,260 7,771 8,049 6,000 2,569
</TABLE>
- -------------------------
(1) Reflects the sale of substantially all the assets of our Florida subsidiary,
Dialysis Services of Florida, Inc. - Fort Walton Beach and related Florida
dialysis operations, including the homecare operations of another subsidiary,
Dialysis Medical, Inc., to Renal Care Group, Inc. and its affiliates for
$5,065,000 of which consideration $4,585,000 was cash with the balance
consisting of 13,873 shares of Renal Care Group common stock. We owned 80% of
Dialysis Services of Florida and Dialysis Medical, Inc., and on February 20,
1998 the 20% interest of Dialysis Services of Florida owned by our former
medical director and his 20% interest in Dialysis Medical, Inc. were redeemed
for approximately $625,000 of which sum included 6,936 shares of the Renal Care
Group common stock valued at $240,000 with the balance in cash. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 9 to "Notes to Consolidated Financial Statements."
(2) Includes advances from Medicore.
23
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
1999 COMPARED TO 1998
Medical service revenues increased approximately $1,946,000 (55%) for
the year ended December 31, 1999 compared to the preceding year. This increase
reflects increased revenues of our Pennsylvania dialysis centers of
approximately $1,460,000 including increased revenues of approximately $882,000
for our dialysis center located in Chambersburg, Pennsylvania, which commenced
operations in January, 1999, and increased revenues of approximately $486,000
for our Manahawkin, New Jersey center, which received regulatory approval in
December, 1998. Although the operations of new centers have resulted in
additional revenues, they are still in the developmental stage and, accordingly,
their operating results will adversely affect our results of operations until
they achieve a sufficient patient count to cover fixed operating costs.
Interest and other income decreased by approximately $85,000 for the
year ended December 31, 1999 compared to the preceding year. This decrease is
largely due to a decrease in interest earned as a result of a decrease in
invested funds.
Cost of medical services sales as a percentage of sales increased to
72% in 1999 compared to 71% in 1998, reflecting an increase in supply costs as a
percentage of sales and a decrease in healthcare salaries as a percentage of
sales.
Selling, general and administrative expenses increased by approximately
$942,000 (51%) for 1999 compared to the preceding year. This increase reflected
operations of the Company's new dialysis centers, $153,000 in compensation
expense from issuance of stock options and approximately $93,000 associated with
our decision not to go through with plans to construct a facility in Toms River,
New Jersey, as well as increased support activities resulting from expanded
operations. Selling general and administrative expenses as a percent of medical
services revenue amounted to 51% for the year ended December 31, 1999, compared
to 52% for the preceding year.
As a result of having centers in the developmental stage which have not
achieved a sufficient patient count to sustain profitable operations, we have
continued to experience operational losses.
Interest expense decreased by approximately $9,000 during the
comparable periods largely as a result of reduced average outstanding
borrowings.
1998 COMPARED TO 1997
Medical service revenues decreased approximately $823,000 (19%) for the
year ended December 31, 1998 compared to the preceding year. This decrease
reflects the loss of revenues, which amounted to approximately $1,663,000 for
the preceding year, from the sale of our Florida dialysis operations on October
31, 1997, which was offset to some degree by increased revenues of our
Pennsylvania dialysis centers of approximately $782,000 including increased
revenues of approximately $510,000 at our dialysis center located in Carlisle,
Pennsylvania, which commenced operations in July 1997 and $58,000 from a new
dialysis center located in Manahawkin, New Jersey, which received regulatory
approval in
24
<PAGE>
December, 1998. Although the operations of these centers have resulted in
additional revenues, they are in the developmental stage and, accordingly, their
operating results will adversely affect our results of operations until they
achieve a sufficient patient count to cover fixed operating costs.
Interest and other income increased by approximately $37,000 for the
year ended December 31, 1998 compared to the preceding year. This increase is
largely due to interest earned on proceeds invested from the October 1997 sale
of our Florida dialysis operations.
Revenues for 1997 included a gain of approximately $4,431,000 upon the
sale of substantially all of the assets of our Florida subsidiary, and its
related operations.
Cost of medical services sales as a percentage of sales increased to
72% in 1999 compared to 71% in 1998 reflecting an increase in supply costs as
a percentage of sales, and a decrease in healthcare salaries as a percentage
of sales.
Selling, general and administrative expenses increased by approxi-
Mately $942,000 (51%) for 1999 compared to the preceding year. This increase
reflected operations of our new dialysis centers, $153,000 in compensation
expense from issuance of stock options and approximately $93,000 associated
with our decision not to go through with plans to construct a facility in
Toms River, New Jersey as well as increased support activities resulting from
expanded operations. Selling, general and administrative expenses as a
percent of medical services revenue amounted to 51% and 52% for the year
ended December 31, 1999 compared to the preceding year.
As a result of having centers in the developmental stage which have
not achieved a sufficient patient count to sustain profitable operations, we
have continued to experience operational losses.
Interest expense decreased by approximately $9,000 during the
comparable periods largely as a result of reduced average outstanding
borrowings.
LIQUIDITY AND CAPITAL RESOURCES
Working capital totaled $4,152,000 at December 31, 1999, which
reflected a decrease of approximately $963,000 during the current year.
Included in the changes in components of working capital was a decrease in
cash and cash equivalents of $1,707,000, which included net cash used in
operating activities of $773,000, net cash used in investing activities of
$768,000 (including additions to property and equipment of $816,000 primarily
related to new centers), and net cash used in financing activities of $166,000
(including a decrease in the advances due from our parent of $16,000 and debt
repayments of $182,000). The change in working capital also reflected increases
of approximately $319,000 in accounts receivable and $151,000 in accounts
payable due to increased sales activity. Other current assets increased
approximately $302,000 largely as a result of an income tax receivable of
approximately $248,000 and income taxes payable decreased $233,000 due to
payment of taxes.
We have mortgages on two of our buildings, one in Lemoyne, Pennsylvania
and the other in Easton, Maryland, with a combined balance of approximately
$282,000 at December 31, 1999. The bank has liens on our real and personal
property, including a lien on all rents due and security deposits from the
rental of these properties. An unaffiliated competitive Maryland dialysis center
continues to lease space from us in our building. The Pennsylvania center
relocated during 1995 and we constructed our
25
<PAGE>
own dialysis facility at the property that commenced treatments in June 1995.
See Note 2 to "Notes to Consolidated Financial Statements."
We have an equipment financing agreement for kidney dialysis machines
for our facilities, which has an outstanding balance of approximately $731,000
at December 31, 1999 and approximately $449,000 at December 31, 1998. This
included additional equipment financing of approximately $387,000 during 1999.
See Note 2 to "Notes to Consolidated Financial Statements."
We opened our fifth center in Chambersburg, Pennsylvania in January,
1999 and opened our sixth center in Vineland, New Jersey in February, 2000.
Capital is needed primarily for the development of outpatient dialysis
centers. The construction of a 15 station facility, typically the size of our
dialysis facilities, costs in the range of $600,000 to $750,000 depending on
location, size and related services to be provided, which includes equipment and
initial working capital requirements. Acquisition of an existing dialysis
facility is more expensive than construction, although acquisition provides us
with an immediate ongoing operation, which most likely would be generating
income. Development of a dialysis facility to initiate operations takes four to
six months and usually 12 months or longer to generate income. We consider three
of our centers, Carlisle, Pennsylvania and Manahawkin and Vineland in New
Jersey, to be in the developmental stage, since they have not developed a
patient base sufficient to generate and sustain earnings for those subsidiaries.
Carlisle and Manahawkin have been operational for approximately 29 months and 19
months, respectively. We have entered into agreements with medical directors,
and intend to establish additional facilities in Georgia and Ohio.
We are seeking to expand our outpatient dialysis treatment facilities
and inpatient dialysis care. Such expansion, whether through acquisitions of
existing centers or the development of our own dialysis centers requires
capital, which was the basis for our security offering in 1996 and sale of our
Florida dialysis operations in 1997. We are presently in different phases of
negotiations with approximately 10 physicians for additional outpatient centers
in Georgia, Maryland, New Jersey Ohio, Pennsylvania, South Carolina and
Virginia. No assurance can be given that we will be successful in implementing
our growth strategy or that our available funds will be adequate to finance such
expansion. See Item 1, "Business - Business Strategy" and Notes 7 and 9 to
"Notes to Consolidated Financial Statements."
We believe that current levels of working capital will enable us to
meet our liquidity demands for at least the next twelve months as well as expand
our dialysis facilities and thereby our patient base.
In January, 2000, we loaned $1,500,000 to our parent, Medicore, at an
annual interest rate of 10%, with the loan and accrued interest to be repaid by
the parent on January 26, 2001. The parent utilized this loan to fund a loan by
it to Linux Global Partners, which invests in Linux software companies, in
conjunction with which the parent acquired a 6% ownership interest in Linux for
$90, with an option to increase its ownership to 8%, which would include making
an additional loan of $500,000 to Linux for which the parent would borrow the
funds from us.
YEAR 2000 READINESS
The Year 2000 computer information processing challenge associated with
the recent millennium change concerned the ability of computerized information
systems to properly recognize date sensitive information, with which many
companies, public and private, were faced to ensure
26
<PAGE>
continued proper operations and reporting of financial condition. Management was
fully aware of the Year 2000 issues, made its assessments, which included
testing each component of software and hardware systems to insure each component
operated properly with the date advanced to the year 2000, developing awareness
and educating employees and patients regarding the Year 2000 issue and advising
them of contingency plans, in case of total operating failure, which would
include transferring the patients to our backup hospitals or referring to other
non-affiliated dialysis centers. The education phase was ongoing to assure staff
and patients of the nature of the Year 2000 issue and the contingency plans then
available. Now that the Year 2000 has arrived, we have not experienced any
computer or other year 2000 problems within any of our systems or with third
party suppliers or providers.
In mid-year 1999, we installed a new Year 2000 compliant accounting
package, providing us with our own independent system of bookkeeping, accounting
and financial records and reducing our reliance on Medicore's system and staff.
This new system's cost, for equipment, software and training, was approximately
$40,000.
One of the most significant risks in our operations with respect to the
recent millenium change related to billing and collection from third-party
payors, and, in particular, Medicare. We receive a substantial portion of our
revenues from Medicare for treatment of dialysis patients and related services.
HCFA, through whom the Medicare program and payments are effected, has indicated
it has done and continues to accomplish all it can to insure the Medicare ESRD
program continues operating smoothly and that dialysis providers, like
ourselves, may continue to timely bill electronically for patient services with
Medicare payments to be made timely. In 1998, we installed a new electronic
billing software program that was developed according to Medicare's compliance
guidelines, which guidelines require not only system but also Year 2000
compatibility. We initiated electronic Medicare billing in January, 1999 without
any problems. Other third-party payors, such as insurance companies, are
presently billed with hard copy. The costs of the software modifications were
minimal, approximately $1,000, and we do not anticipate any further costs with
respect to Year 2000 compliance, and, if any, such would not be anticipated to
be material.
With respect to non-information technology systems, which typically
include embedded technology, such as microcontrollers, the major equipment used
in patient dialysis treatment is not date sensitive and did not pose any threat
of a system breakdown due to the Year 2000 issue. Most of our dialysis equipment
is new. We retain technicians who test and maintain dialysis operations
equipment.
In addition to addressing our own internal software system and
equipment, we had communicated with all of our suppliers, service providers and
other key third parties, including banks, hospitals, insurance companies, drug
and medical equipment and soft good suppliers, utilities, waste removal and
water and sewer services with whom we deal to determine the extent of their Year
2000 compliance, what actions they were taking to assess and address that issue,
and whether they would be compliant. We received written assurances from these
third parties indicating that they were Year 2000 compliant, and, in fact, we
have not experienced any material adverse effects in entering into the Year
2000.
We assumed a worse case scenario that some of our critical suppliers
might experience a millenium problem and limit, delay or be unable to deliver
supplies for patient treatment. In response, we identified other sources of
supplies and maintained specific contacts with those suppliers, and had it been
necessary, which it was not, would have requested those suppliers to carry more
inventory earmarked for us. At the millenium change there were no supply
problems.
27
<PAGE>
Another area that could have significantly impacted our operations in
providing dialysis treatment to patients related to third-party providers,
specifically, the utility companies providing water, a necessary resource for
dialysis treatments, and electricity. These providers and services are beyond
our control, and we do not have a separate generator for electricity nor other
sources for water. None of these utilities have failed to provide services.
However, we had in place plans to reduce the impact of any such utility
shortages or outages which included notification to our utilities companies of
our dialysis center locations, schedules and emergency services required and a
24-hour contact as well as notification to each of our landlords to assure
access to the facility for our staff and key service providers.
We have not experienced any material unanticipated negative
consequences from the Year 2000 issues. We believe our assessment and
implementation of our Year 2000 issues were satisfactorily completed, as
evidenced by our continued and uninterrupted dialysis operations. However, we
have only just entered the new millenium, and there may yet arise Year 2000
problems that we are not aware of These unknowns do not allow us the ability to
predict with any significant accuracy or to quantify these Year 2000 issues'
impact upon us, since they would involve uncertainty of costs we might incur as
a result of these unknown Year 2000 failures that might yet occur despite the
successful implementation of our program.
NEW ACCOUNTING PRONOUNCEMENT
In June, 1998, the Financial Accounting Standards Board issued
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (FAS 133). FAS 133 is
effective for fiscal years beginning after June 15, 2000. FAS 133
establishes accounting and reporting standards for derivative instruments
and for hedging activities and requires, among other things, that all
derivatives be reorganized as either assets or liabilities in the statement
of financial position and that these instruments be measured at fair value.
We are in the process of determining the impact that the adoption of FAS
133 will have on our consolidated financial statements.
PROPOSED MERGER AND ACQUISITION
On October 20, 1999, we entered into an Agreement and Plan of Merger
pursuant to which MainStreet would merge with us and own approximately 80%
of our Company. That proposed transaction also provides for a simultaneous
sale of our operations to our parent in consideration for approximately 90%
of the parent's ownership of the Company, our parent's assumption of our
long-term debt and other liabilities, and our parent's waiver of most
proceeds from the potential exercise of outstanding warrants and under-
writers' options. See Item 1, "Business - Important Developments" and Note
12 to "Notes to Consolidated Financial Statements."
LOAN TO PARENT COMPANY
On January 27, 2000, our parent borrowed $1,500,000 from us with a
10% annual interest rate, with the loan to be repaid with accrued interest
by January 26, 2001. An additional $500,000 was borrowed from us by our
parent under the same terms as the original borrowing. Our parent utilized
the monies to loan to Linux Global Partners, a holding company investing in
Linux software companies. See Note 13 to "Notes to Consolidated Financial
Statements" and "Certain Relationships and Related Transactions" of our
Information Statement relating to our Annual Meeting of Shareholders
anticipated to be held on May 24, 2000, which is incorporated herein by
reference.
RECENT DEVELOPMENTS
Effective March 1, 2000, Bart Pelstring resigned as President,
succeeded by Stephen Everett, formerly our Executive Vice President. Mr.
Pelstring will remain as a director of the Company and our subsidiaries.
28
<PAGE>
IMPACT OF INFLATION
Inflationary factors have not had a significant effect on our
operations. A substantial portion of our revenue is subject to reimbursement
rates established and regulated by the federal government. These rates do not
automatically adjust for inflation. Any rate adjustments relate to legislation
and executive and Congressional budget demands, and have little to do with the
actual cost of doing business. See "Operations - Medicare Reimbursement" and
"Government Regulation" under Item 1, "Business." Therefore, dialysis services
revenues cannot be voluntary increased to keep pace with increases in nursing
and other patient care costs. Increased operating costs without a corresponding
increase in reimbursement rates may adversely affect our earnings in the future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We do not consider our exposure to market risks, principally changes in
interest rates, to be significant.
Sensitivity of results of operations to interest rate risks on our
investments is managed by conservatively investing liquid funds in short-term
government securities of which we held approximately $3,383,000 at December 31,
1999.
Interest rate risk on debt is managed by negotiation of appropriate
rates for equipment financing obligations based on current market rates. There
is an interest rate risk associated with our variable rate mortgage obligations
which totaled $282,000 at December 31, 1999.
We have has exposure to both rising and falling interest rates. A 1/2%
decrease in rates on our year-end investments in government securities and a 1%
increase in rates on our year-end mortgage debt would result in a negative
impact of approximately $12,000 on our result of operations.
We do not utilize financial instruments for trading or speculative
purposes and do not currently use interest rate derivatives.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section to this
Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective August 6, 1999, the board of directors, upon the
recommendation of the audit committee, terminated Ernst & Young LLP as our
independent accountants, and engaged new independent accountants, Wiss &
Company, LLP, for the Company's annual audit for our 1999 fiscal year.
This matter was previously reported on our Current Report on Form 8-K
dated August 27, 1999. For more details you are referred to the caption
"Proposals, 2. Ratification of Wiss & Young, LLP as Independent Auditors" of
our Information Statement relating to the Annual Meeting of Shareholders
anticipated to be held on May 24, 2000, which is incorporated herein by
reference.
29
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are appointed each year by the
board of directors at its first meeting following the annual meeting of
shareholders, to serve during the ensuing year. The following information
indicates their positions with the Company and age of the executive officers at
March 15, 2000. There are no family relationships between any of the executive
officers and directors of the Company.
Name Age Position Held Since
- ---- --- -------- ----------
Thomas K. Langbein 54 Chairman of the Board and 1980
Chief Executive Officer 1986
Stephen W. Everett 44 President 2000
Daniel R. Ouzts 53 Vice President (Finance)
and Treasurer 1996
For more detailed information about our executive officers and
directors you are referred to the caption "Information About Directors and
Executive Officer" of our Information Statement relating to the annual meeting
of shareholders anticipated to be held on May 24, 2000, which is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information on executive compensation is included under the caption
"Executive Compensation" of our Information Statement relating to the annual
meeting of shareholders anticipated to be held on May 24, 2000, incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information on beneficial ownership of our voting securities by each
director and all officers and directors as a group, and for each of the named
executive officers disclosed in the Summary Compensation Table (see "Executive
Compensation" of our Information Statement relating to the annual meeting of
shareholders anticipated to be held on May 24, 2000, incorporated herein by
reference), and by any person known to beneficially own more than 5% of any
class of our voting security, is included under the caption "Beneficial
Ownership of the Company's Securities" of our Information Statement relating to
the annual meeting of shareholders anticipated to be held on May 24, 2000,
incorporated herein by reference.
30
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information on certain relationships and related transactions is
included under the caption "Certain Relationships and Related Transactions" of
our Information Statement relating to the annual meeting of shareholders
anticipated to be held on May 24, 2000, incorporated herein by reference.
31
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following is a list of documents filed as part of this report.
1. All financial statements - See Index to Consolidated Financial
Statements.
2. Financial statement schedules - See Index to Consolidated
Financial Statements.
3. Refer to subparagraph (c) below.
(b) Reports on Form 8-K
None
(c) Exhibits +
(3) (i) Articles of Incorporation++
(ii) By-Laws of the Company++
(4) (i) Form of Common Stock Certificate of the Company++
(ii) Form of Redeemable Common Stock Purchase Warrant++
(iii) Form of Underwriters' Options++
(iv) Form of Warrant Agreement between the Company, Continental
Stock Transfer & Trust Co. and Joseph Dillon & Co., Inc.++
(v) Amendment No. 1 to Warrant Agreement between the Company,
Continental Stock Transfer & Trust Co. and Joseph Dillon &
Co., Inc. dated March 9, 1999 (incorporated by reference to
the Company's Current Report on Form 8-K dated March 9, 1999,
Item 7(c)(4)(i)).
(vi) Amendment No. 2 to Warrant Agreement between the Company,
Continental Stock Transfer & Trust Co. and Joseph Dillon &
Co., Inc. dated September 13, 1999.
(vii) Amendment No. 3 to Warrant Agreement between the Company,
Continental Stock Transfer & Trust Co. and Joseph Dillon &
Co., Inc., dated March 22, 2000 (incorporated by reference to
the Company's Current Report on Form 8-K dated March 20,
2000, Item 7(c)(10)(i)).
32
<PAGE>
(10) Material Contracts
(i) Lease between Dialysis Services of Pennsylvania, Inc. -
Wellsboro(1) and James and Roger Stager dated January 15, 1995
(incorporated by reference to Medicore, Inc.'s(2) Annual
Report on Form 10-K for the year ended December 31, 1994
("1994 Medicore Form 10-K"), Part IV, Item 14(a) 3
(10)(lxii)).
(ii) Lease between the Company and Dialysis Services of
Pennsylvania, Inc. - Lemoyne(1) dated December 1, 1998
(incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1998, Part IV, Item
14(c)(10)(ii)).
(iii) Loan Agreement between the Company and Mercantile-Safe Deposit
and Trust Company dated November 30, 1988(3) (incorporated by
reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998 ("March, 1998 Form 10-Q"),
Part II, Item 6(a), Part II, Item 10(iii)).
(iv) First Amendment to Loan Agreement between the Company and
Mercantile-Safe Deposit and Trust Company dated December 1,
1997(3) (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997
("1997 Form 10-K"), Part IV, Item 14(c)(xxviii)).
(v) Promissory Note to Mercantile-Safe Deposit and Trust Company
dated November 30, 1988(3) (incorporated by reference to the
March, 1998 Form 10-Q, Part II, Item 6(a), Part II, Item
10(ii)).
(vi) First Amendment and Modification to Promissory Note to
Mercantile-Safe Deposit and Trust Company(3) (incorporated by
reference to the 1997 Form 10-K, Part IV, Item 14(c)(xxix)).
(vii) Medical Director Agreement between Dialysis Services of
Pennsylvania, Inc. - Wellsboro(2) and George Dy, M.D. dated
September 29, 1994 [*] (incorporated by reference to Medicore,
Inc.'s(2) Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994 as amended January, 1995 ("September, 1994
Medicore(2) Form 10-Q"), Part II, Item 6(a)(10)(i)).
(viii) Medical Director Agreement between Dialysis Services of
Pennsylvania, Inc. - Lemoyne(1) and Herbert I. Soller, M.D.
dated January 30, 1995 [*] (incorporated by reference to the
1994 Medicore(2) Form 10-K, Part IV, Item 14(a)(3)(10)(lx)).
(ix) Agreement for In-Hospital Dialysis Services between Dialysis
Services of Pennsylvania, Inc. - Wellsboro(1) and Soldiers &
Sailors Memorial Hospital dated September 28, 1994 [*]
(incorporated by reference to September, 1994 Medicore(2)
Form 10-Q, Part II, Item 6(a)(10)(ii)).
[*] Confidential portions omitted have been filed separately with
the Securities and Exchange Commission.
33
<PAGE>
(x) Agreement for In-Hospital Dialysis Services between Dialysis
Services of Pennsylvania, Inc. - Lemoyne(1) and Pinnacle
Health Hospitals dated June 1, 1997 [*] (incorporated by
reference to the Company's Current Report on Form 8-K dated
June 19, 1997, Item 7(c)(10)(i)).
(xi) 1995 Stock Option Plan of the Company (November 10, 1995).++
(xii) Form of Stock Option Certificate under 1995 Stock Option Plan
(November 10, 1995).++
(xiii) Lease between Dialysis Services of PA., Inc. - Carlisle(1)
and Lester P. Burkholder, Jr. and Kirby K. Burkholder dated
November 1, 1996 (incorporated by reference to the Company's
1996 Form 10-K, Part IV, Item 14(a) 3 (10)(xxiii)).
(xiv) Lease between Dialysis Services of NJ., Inc. - Manahawkin(4)
and William P. Thomas dated January 30, 1997 (incorporated by
reference to the Company's 1996 Form 10-K, Part IV, Item
14(a) 3 (10)(xxiv)).
(xv) Addendum to Lease Agreement between William P. Thomas and
Dialysis Services of NJ., Inc. - Manahawkin(4) dated June 4,
1997 (incorporated by reference to the 1997 Form 10-K, Part
IV, Item 14(c)(xviii)).
(xvi) Equipment Master Lease Agreement BC-105 between the Company
and B. Braun Medical, Inc. dated November 22, 1996
(incorporated by reference to the Company's 1996 Form 10-K,
Part IV, Item 14(a) 3 (10)(xxvii)).
(xvii) Schedule of Leased Equipment 0597 commencing June 1, 1997 to
Master Lease BC-105 (incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997 ("June, 1997 10-Q"), Part II, Item 6(a), Part
II, Item 10(i)).(5)
(xviii) Agreement for In-Hospital Dialysis Services between Dialysis
Services of Pennsylvania, Inc. - Carlisle(1) and Carlisle
Hospital dated August 15, 1997 [*] (incorporated by reference
to the Company's Current Report on Form 8-K dated August 29,
1997, Item 7(c)(10)(i)).
(xix) Asset Purchase Agreement by and among the Company, Dialysis
Services of Florida, Inc. - Fort Walton Beach(6), DCA Medical
Services, Inc.(1), Dialysis Medical, Inc., Renal Care Group,
Inc., Renal Care Group of the Southeast, Inc. and Henry M.
Haire, M.D. dated October 31, 1997 (incorporated by reference
to the Company's Current Report on Form 8-K dated November
12, 1997, Part II, Item 7(c)(2.1)).
(xx) Medical Director Agreement between Dialysis Services of NJ,
Inc. - Manahawkin(4) and Atlantic Nephrology Group, Inc.
dated January 21, 1998(7) [*] (incorporated by reference to
the Company's September, 1996 Form 10-Q, Part II, Item 6(a),
Part II, Item 10(i)).
[*] Confidential portions omitted have been filed separately with
the Securities and Exchange Commission.
34
<PAGE>
(xxi) Lease between Dialysis Services of Pa., Inc. - Chambers-
burg(1) and BPS Development Group dated April 13, 1998
(incorporated by reference to the Company's March, 1998 Form
10-Q, Part II, Item 6(a), Part II, Item 10(i)).
(xxii) Lease between the Company and Wirehead Networking Solutions,
Inc. dated December 1, 1998 (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998, Part IV, Item 14(c)(10)(xxvi)).
(xxiii) 1999 Stock Option Plan of the Company (May 21, 1999).
(xxiv) Form of Stock Option Certificate under the 1999 Stock Option
Plan (May 21, 1999).
(xxv) Lease between DCA of Vineland, LLC(4) and Maintree Office
Center, L.L.C. dated May 10, 1999.
(xxvi) Medical Director Agreement between DCA of Vineland, LLC(4)
and Vineland Dialysis Professionals dated April 30, 1999.
(xxvii) Medical Director Agreement between Dialysis Services of PA.,
Inc. - Carlisle(4) and Cumberland Valley Nephrology
Associates, P.C. dated April 30, 1999(8).
(xxviii) Management Services Agreement between the Company and DCA of
Vineland, LLC(4) dated April 30, 1999(9).
(xxix) Amendment No. 1 to Management Services Agreement between the
Company and DCA of Vineland, LLC(4) dated October 27, 1999.
(xxx) Indemnity Deed of Trust from the Company to Trustees for the
benefit of St. Michaels Bank dated December 3, 1999
(incorporated by reference to the Company's Current Report on
Form 8-K dated December 13, 1999 ("December Form 8-K"), Item
7(c)(99)(i)).
(xxxi) Guaranty Agreement from the Company to St. Michaels Bank
dated December 3, 1999 (incorporated by reference to the
Company's December Form 8-K, Item 7(c)(99)(ii)).
(xxxii) Promissory Note from Medicore, Inc.(2) to the Company dated
January 27, 2000 (incorporated by reference to the Company's
Current Report on Form 8-K dated February 10, 2000, Item
7(c)10.1)
(xxxiii) Management Services Agreement between DCA of Vineland, LLC(4)
and DCA Medical Services, Inc. (1) dated January 1, 2000(10).
[*] Confidential portions omitted have been filed separately with
the Securities and Exchange Commission.
35
<PAGE>
(16)(i) Letter re change in certifying accountant dated August 13,
1999 (incorporated by reference to the Company's Current
Report on Form 8-K dated August 13, 1999, Item 7(c)(16)).
(ii) Letter re change in certifying accountant dated August 27,
1999 (incorporated by reference to the Company's Current
Report on Form 8-K/A#1 dated August 27, 1999, item 7(c)(16)).
(21) Subsidiaries of the Company.
(23) Consent of experts and counsel
(i) Consent of Ernst & Young LLP, Independent Certified Public
Accountants
(ii) Consent of Wiss & Company, LLP, Independent Certified Public
Accountants
(27) Financial Data Schedule (for SEC use only).
- -------------------------
+ Documents incorporated by reference not included in Exhibit Volume.
++ Incorporated by reference to the Company's Registration Statement on
Form SB-2 dated December 22, 1995 as amended February 9, 1996, April
2, 1996 and April 15, 1996, Registration No. 33-80877-A, Part II,
Item 27.
(1) Wholly-owned subsidiary.
(2) Parent of the Company owning approximately 68% of the Company's
outstanding common stock. Medicore is subject to Section 13(a)
reporting requirements of the Exchange Act, with its common stock
listed for trading on the Nasdaq SmallCap Market.
(3) Dialysis Corporation of America has two loans with Mercantile Safe
Deposit and Trust Company and such loan documents and promissory notes
conform to the exhibit filed but for the amount of each loan.
(4) 80% owned facility.
(5) Dialysis equipment is leased from time to time and a new schedule is
added to the Master Lease; other than the nature of the equipment and
the length of the lease, the Schedules conform to the exhibit filed
and the terms of the Master Lease remain the same.
(6) 100% owned subsidiary, assets sold; now inactive.
(7) Previously filed with the same Medical Director under the name
Oceanview Medical Group, P.A.
(8) There are two Medical Director Agreements with Cumberland Valley
Nephrology Associates, P.C. and such agreements conform to the exhibit
filed but for the facility, the other facility located in
Chambersburg, Pennsylvania.
(9) There are several substantially similar Management Services Agreements
which conform to the exhibit filed but for the name of the particular
subsidiary which entered into the Agreement.
(10) Each subsidiary has the identical Management Services Agreement with
DCA Medical Services, Inc.
36
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
DIALYSIS CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
DECEMBER 31, 1999
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------------------------------------------------------------------------------------------------
Additions
Balance at Additions (Deductions) Charged to Other Changes Balance
Beginning Charged (Credited) to Other Accounts Add (Deduct) at End of
Classification Of Period Cost and Expenses Describe Describe Period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $ 144,000 $ 98,000 $ (5,000)(1) $ 237,000
Valuation allowance for deferred tax asset 80,000 117,000 -- 197,000
--------- --------- --------- ---------
$ 224,000 $ 215,000 $ (5,000) $ 434,000
========= ========= ========= =========
YEAR ENDED DECEMBER 31, 1998:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $ 52,000 $ 101,000 $ (9,000)(1) $ 144,000
Valuation allowance for deferred tax asset -- 80,000 -- 80,000
--------- --------- --------- ---------
$ 52,000 $ 181,000 $ (9,000) $ 224,000
========= ========= ========= =========
YEAR ENDED DECEMBER 31, 1997:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $ 154,000 $ 37,000 $ (93,000)(1) $ 52,000
(46,000)(2)
Valuation allowance for deferred tax asset 17,000 (17,000) -- --
--------- --------- --------- ---------
$ 171,000 $ 20,000 $(139,000) $ 52,000
========= ========= ========= =========
</TABLE>
(1) Uncollectable accounts written off, net of recoveries.
(2) Sale of subsidiaries' assets.
37
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DIALYSIS CORPORATION OF AMERICA
By: /s/ THOMAS K. LANGBEIN
----------------------------------
Thomas K. Langbein
Chairman of the Board of Directors
March 28, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ THOMAS K. LANGBEIN Chairman of the Board of Directors March 28, 2000
- ---------------------------
Thomas K. Langbein
/s/ STEPHEN W. EVERETT President March 28, 2000
- ---------------------------
Stephen Everett
/s/ DANIEL R. OUZTS Vice President, Treasurer, Chief March 28, 2000
- --------------------------- Financial Officer and Controller
Daniel R. Ouzts
/s/ BART PELSTRING Director March 28, 2000
- ---------------------------
Bart Pelstring
/s/ ROBERT W. TRAUSE Director March 28, 2000
- ---------------------------
Robert W. Trause
/s/ DR. HERBERT I. SOLLER Director March 28, 2000
- ---------------------------
Dr. Herbert I. Soller
38
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM I, ITEM 14(a) (1) AND (2), (c) AND (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1999
DIALYSIS CORPORATION OF AMERICA
LEMOYNE, PENNSYLVANIA
<PAGE>
FORM 10-K--ITEM 14(A)(1) AND (2)
DIALYSIS CORPORATION OF AMERICA
LIST OF FINANCIAL STATEMENTS
The following consolidated financial statements of Dialysis Corporation of
America and subsidiaries are included in Item 8:
Page
----
Consolidated Balance Sheets as of December 31, 1999 and 1998. F-4
Consolidated Statements of Operations - Years ended
December 31, 1999, 1998, and 1997. F-5
Consolidated Statements of Stockholders' Equity - Years ended
December 31, 1999, 1998 and 1997. F-6
Consolidated Statements of Cash Flows - Years ended December
31, 1999, 1998 and 1997. F-7
Notes to Consolidated Financial Statements - December 31, 1999. F-8
The following financial statement schedule of Dialysis Corporation of America
and subsidiaries is included in Item 14(d):
Schedule II - Valuation and qualifying accounts.
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
Dialysis Corporation of America
We have audited the accompanying consolidated balance sheet of Dialysis
Corporation of America and subsidiaries as of December 31, 1999, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. Our audit also included the financial state-
ment schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Dialysis Corporation of America and subsidiaries at December 31, 1999, and the
consolidated results of their operations and their cash flows for the year
then ended, in conformity with generally accepted accounting principles. Also,
in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ WISS & COMPANY, LLP
March 10, 2000
Livingston, New Jersey
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
Dialysis Corporation of America
We have audited the accompanying consolidated balance sheet of Dialysis
Corporation of America and subsidiaries as of December 31, 1998, and
the related consolidated statements of operations, stockholders' equity and
cash flows for each of the two years in the period ended December 31, 1998.
Our audits also included the information related to each of the two years in
the period ended December 31, 1998 on the financial statement schedule listed
in the Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Dialysis Corporation of America and subsidiaries at December 31, 1998,
and the consolidated results of their operations and their cash flows for each
of the two years in the period ended December 31, 1998, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule for the two years in the
period ended December 31, 1998, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ ERNST & YOUNG LLP
March 22, 1999
Miami, Florida
F-3
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
----------- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,659,390 $ 5,366,837
Accounts receivable, less allowance
of $237,000 at December 31, 1999;
$144,000 at December 31, 1998 779,568 460,786
Inventories 219,623 179,189
Prepaid expenses and other current assets 397,361 52,934
----------- -----------
Total current assets 5,055,942 6,059,746
Property and equipment:
Land 168,358 168,358
Buildings and improvements 1,425,912 1,404,573
Machinery and equipment 2,051,803 1,381,460
Leasehold improvements 1,660,172 1,149,300
----------- -----------
5,306,245 4,103,691
Less accumulated depreciation and amortization 1,454,190 1,003,995
----------- -----------
3,852,055 3,099,696
Advances to parent 105,142 120,865
Deferred expenses and other assets 22,808 68,617
----------- -----------
$ 9,035,947 $ 9,348,924
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 395,002 $ 243,968
Accrued expenses 365,351 292,594
Current portion of long-term debt 143,438 175,902
Income taxes payable -- 232,306
----------- -----------
Total current liabilities 903,791 944,770
Long-term debt, less current portion 869,985 632,664
Minority interest in subsidiaries 2,080 --
Commitments
Stockholders' equity:
Common stock, $.01 par value, authorized
20,000,000 shares; 3,546,344 shares issued
and outstanding in 1999; 3,751,344 shares issued and
3,546,344 shares outstanding in 1998 35,463 37,513
Capital in excess of par value 3,971,514 4,044,154
Retained earnings 3,253,114 4,004,763
Treasury stock at cost; 205,000 shares -- (314,940)
----------- -----------
Total stockholders' equity 7,260,091 7,771,490
----------- -----------
$ 9,035,947 $ 9,348,924
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Medical service revenue $ 5,498,541 $ 3,552,279 $ 4,375,165
Gain on sale of subsidiaries' assets -- -- 4,430,663
Interest and other income 367,030 451,656 414,970
----------- ----------- -----------
5,865,571 4,003,935 9,220,798
Cost and expenses:
Cost of medical services 3,964,258 2,516,239 2,712,527
Selling, general and administrative expenses 2,789,529 1,847,175 2,155,459
Interest expense 72,605 81,531 86,129
----------- ----------- -----------
6,826,392 4,444,945 4,954,115
----------- ----------- -----------
(Loss) income before income taxes and minority interest (960,821) (441,010) 4,266,683
Income tax (benefit) provision (292,462) (236,838) 1,699,000
----------- ----------- -----------
(Loss) income before minority interest (668,359) (204,172) 2,567,683
Minority interest in income (loss)
of consolidated subsidiaries -- -- 574,303
----------- ----------- -----------
Net (loss) income $ (668,359) $ (204,172) $ 1,993,380
=========== =========== ===========
(Loss) earnings per share:
Basic $ (.19) $ (.06) $ .56
=========== =========== ===========
Diluted $ (.19) $ (.06) $ .55
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CAPITAL IN
COMMON EXCESS OF RETAINED TREASURY
STOCK PAR VALUE EARNINGS STOCK TOTAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $ 35,888 $ 3,748,595 $ 2,215,555 $ 6,000,038
Net income 1,993,380 1,993,380
Repurchase of 100,000 shares $ (206,250) (206,250)
Exercise of stock options 1,625 260,125 261,750
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 37,513 4,008,720 4,208,935 (206,250) 8,048,918
Net loss (204,172) (204,172)
Repurchase of 105,000 shares (108,690) (108,690)
Redemption of minority interest in subsidiaries 35,434 35,434
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 37,513 4,044,154 4,004,763 (314,940) 7,771,490
Net loss (668,359) (668,359)
Issuance of stock options as compensation 153,000 153,000
Sale of minority interest in subsidiaries 3,960 3,960
Cancellation of 205,000 treasury shares (2,050) (229,600) (83,290) 314,940 --
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 $ 35,463 $ 3,971,514 $ 3,253,114 $ -- $ 7,260,091
=========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities:
Net (loss) income $ (668,359) $ (204,172) $ 1,993,380
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Gain on sale of subsidiaries' assets -- -- (4,430,663)
Depreciation 450,460 332,697 278,761
Amortization 1,743 1,690 11,116
Bad debt expense 98,666 100,856 36,726
Deferred income taxes -- 24,000 --
Gain on sale of securities -- (12,780) --
Minority interest -- -- 574,303
Stock option related compensation expense 153,000 -- 322,125
Increase (decrease) relating to operating activities from:
Accounts receivable (417,448) (67,479) (357,280)
Inventories (40,434) (65,374) (5,223)
Prepaid expenses and other current assets (342,427) 43,825 (12,087)
Accounts payable 151,034 171,437 (76,129)
Accrued expenses 72,757 (62,505) 58,341
Income taxes payable (232,306) (1,422,858) 1,649,164
----------- ----------- -----------
Net cash (used in) provided by operating activities (773,314) (1,160,663) 42,534
Investing activities:
Proceeds from sale of subsidiaries' assets -- -- 4,583,662
Redemption of minority interest in subsidiaries -- (385,375) --
Additions to property and equipment, net of minor disposals (815,919) (904,873) (631,103)
Proceeds from sale of securities -- 252,780 --
Deferred expenses and other assets 44,066 (27,219) (23,429)
Sale of minority interest in subsidiaries 4,040 -- --
----------- ----------- -----------
Net cash (used in) provided by investing activities (767,813) (1,064,687) 3,929,130
Financing activities:
Advances (to) from parent 15,723 (249,592) (240,820)
Repurchase of stock -- (108,690) (206,250)
Payments on long-term debt (182,043) (152,451) (136,502)
Exercise of stock options -- -- 1,625
Dividend payments to minority shareholders -- -- (3,966)
----------- ----------- -----------
Net cash (used in) provided by financing activities (166,320) (510,733) (585,913)
----------- ----------- -----------
(Decrease) increase in cash and cash equivalents (1,707,447) (2,736,083) 3,385,751
Cash and cash equivalents at beginning of year 5,366,837 8,102,920 4,717,169
----------- ----------- -----------
Cash and cash equivalents at end of period $ 3,659,390 $ 5,366,837 $ 8,102,920
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
The Company is in one business segment, kidney dialysis operations,
providing outpatient hemodialysis services, home dialysis services, inpatient
dialysis services and ancillary services associated with dialysis treatments.
The Company operates five kidney dialysis centers, four located in Pennsylvania
and one in New Jersey and opened a sixth kidney dialysis center in New Jersey in
February 2000, and has agreements to provide inpatient dialysis treatments to
various hospitals and provides supplies and equipment for dialysis home
patients.
CONSOLIDATION
The consolidated financial statements include the accounts of Dialysis
Corporation of America ("DCA") and its subsidiaries, collectively referred to as
the "Company." All material intercompany accounts and transactions have been
eliminated in consolidation. The Company is a 68.0% owned subsidiary of
Medicore, Inc. (the "Parent").
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
GOVERNMENT REGULATION
A substantial portion of the Company's revenues are attributable to payments
received under Medicare, which is supplemented by Medicaid or comparable
benefits in the state in which the Company operates. Reimbursement rates under
these programs are subject to regulatory changes and governmental funding
restrictions. Laws and regulations governing the Medicare and Medicaid programs
are complex and subject to interpretation. The Company believes that it is in
compliance with all applicable laws and regulations and is not aware of any
pending or threatened investigations involving allegations of potential
wrongdoing. While no such regulatory inquiries have been made, compliance with
such laws and regulations can be subject to future government review and
interpretations as well as significant regulatory action including fines,
penalties, and exclusions from the Medicare and Medicaid programs.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. The carrying amounts
reported in the balance sheet for cash and cash equivalents approximate their
fair values. The credit risk associated with cash and cash equivalents is
considered low due to the high quality of the financial institutions in which
these assets are invested.
F-8
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
INVENTORIES
Inventories, which consist primarily of supplies used in dialysis
treatments, are valued at the lower of cost (first-in, first-out method) or
market value.
PROPERTY AND EQUIPMENT
Property and equipment is stated on the basis of cost. Depreciation is
computed by the straight-line method over the estimated useful lives of the
assets, which range from 5 to 34 years for buildings and improvements; 4 to 10
years for machinery, computer and office equipment, and furniture; and 5 to 10
years for leasehold improvements, based on the shorter of the lease term or
estimated useful life of the property. Replacements and betterments that
extend the lives of assets are capitalized. Maintenance and repairs are
expensed as incurred. Upon the sale or retirement of assets, the related cost
and accumulated depreciation are removed and any gain on loss is recognized.
LONG-LIVED ASSET IMPAIRMENT
Pursuant to Financial Accounting Standards Board Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets to be Disposed of,"
impairment of long-lived assets, including intangibles related to such assets,
is recognized whenever events or changes in circumstances indicate that the
carrying amount of the asset, or related groups of assets, may not be fully
recoverable from estimated future cash flows and the fair value of the related
assets is less than their carrying value. The Company, based on current
circumstances, does not believe any indicators of impairment are present.
DEFERRED EXPENSES
Deferred expenses, except for deferred loan costs, are amortized on the
straight-line method, over their estimated benefit period ranging to 60 months.
Deferred loan costs are amortized over the lives of the respective loans.
INCOME TAXES
Deferred income taxes are determined by applying enacted tax rates
applicable to future periods in which the taxes are expected to be paid or
recovered to differences between financial accounting and tax basis of assets
and liabilities.
STOCK-BASED COMPENSATION
The Company follows Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB25) and related Interpretations in accounting
for its employee stock options. Financial Accounting Standards Board Statement
No. 123, "Accounting for Stock-Based Compensation" permits a company to elect to
follow the accounting provisions of APB 25 rather than the alternative fair
value accounting provided under FAS 123 but requires pro forma net income and
earnings per share disclosures as well as various other disclosures not required
under APB 25 for companies following APB 25.
F-9
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
EARNINGS PER SHARE
Diluted earning per share gives effect to potential common shares that
were dilutive and outstanding during the period, such as stock options and
warrants, calculated using the treasury stock method and average market price.
Following is a reconciliation of amounts used in the basic and diluted
computations:
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ---------- ----------
Net (loss) income $ (668,359) $ (204,172) $1,993,380
=========== ========== ==========
Weighted average shares-denominator
basic computation 3,546,344 3,626,330 3,531,584
Effect of dilutive stock options:
Stock options granted November 1995 -- -- 86,539
----------- ---------- ----------
Weighted average shares, as
adjusted-denominator diluted
computation 3,546,344 3,626,330 3,618,123
=========== ========== ==========
Earnings (loss) per share:
Basic $ (.19) $ (.06) $ .56
=========== ========== ==========
Diluted $ (.19) $ (.06) $ .55
=========== ========== ==========
In addition to the dilutive stock options included in the reconciliation
above, which have an exercise price of $1.50 per share, there were 10,000
medical director options, 2,300,000 common stock purchase warrants and
underwriter options to purchase 100,000 shares of common of common stock and
200,000 common stock purchase warrants which have not been included in the
earnings per share computation since they are anti-dilutive.
INTEREST AND OTHER INCOME
Interest and other income is comprised as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
Rental income $1,142,561 $ 121,835 $ 119,792
Interest income 194,984 296,943 227,789
Other 29,485 32,878 67,389
---------- ---------- ----------
$ 367,030 $ 451,656 $ 414,970
========== ========== ==========
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, accounts receivable and debt in the accompanying
financial statements approximate their fair value because of the short-term
maturity of these instruments, and in the case of debt because such instruments
bear variable interest rates which approximate market.
F-10
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 and 1997 financial
statements to conform to the 1999 presentation.
NEW PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133). FAS 133 is effective for fiscal
years beginning after June 15, 2000. FAS 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities and
requires, among other things, that all derivatives be recognized as either
assets or liabilities in the statement of financial position and that these
instruments be measured at fair value. The Company is in the process of
determining the impact that the adoption of FAS 133 will have on its
consolidated financial statements.
NOTE 2--LONG-TERM DEBT
Long-term debt is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
---------- ----------
<S> <C> <C>
Mortgage note secured by land and building
with a net book value of $390,000 at
December 31, 1999. Monthly principal
payments of $3,333 plus interest at 1%
over the prime rate through November 2003 $ 156,711 $ 200,040
Mortgage note secured by land and building with
a net book value of $688,000 at December 31, 1999
Monthly principal payments of $2,667 plus interest
at 1% over the prime rate through November 2003 125,289 159,960
Equipment financing agreement secured by equipment
with a net book value of $772,000 at December 31,
1999. Monthly payments totaling $8,582 as of
December 31, 1999, including principal and interest,
as described below, pursuant to various schedules
extending through May 2005 with interest at rates
ranging from 4.14% to 11.84% 731,423 448,566
---------- ----------
1,013,423 808,566
Less current portion 143,438 175,902
---------- ----------
$ 869,985 $ 632,664
========== ==========
</TABLE>
F-11
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 2--LONG-TERM DEBT--CONTINUED
The Company through its subsidiary, DCA of Vineland, LLC, pursuant to a
December 3, 1999 loan agreement obtained a $700,000 development and equipment
line of credit with interest at 8.75% which is secured by the acquired assets of
DCA of Vineland and a second mortgage on the Company's real property in Easton,
Maryland on which an affiliated bank holds the first mortgage. Outstanding
borrowings are subject to monthly payments of interest and principal with any
remaining balance due September 1, 2003. There were no outstanding borrowings
under this line of credit as of December 31, 1999.
The equipment financing agreement provides financing for kidney dialysis
machines for the Company's dialysis facilities in Pennsylvania and New Jersey.
Additional financing totaled approximately $190,000 in 1997, $245,000 in 1998
and $387,000 in 1999. Payments under the agreement are pursuant to various
schedules extending through May 2005. Payments under some schedules begin one
year after commencement of the financing which would increase monthly payments
from $8,582 as of December 31, 1999 to $23,744 if all payments had commenced as
of that date.
Financing under the equipment purchase agreement is a noncash financing
activity which is a supplemental disclosure required by Financial Accounting
Standards Board Statement No 95, "Statement of Cash Flows."
The prime rate was 8.50% as of December 31, 1999 and 7.75% as of December
31, 1998.
Scheduled maturities of long-term debt outstanding at December 31, 1999 are
approximately: 2000-$143,438; 2001-$252,863; 2002-$251,686; 2003-$242,527;
2004-$121,905; thereafter-$1,004. Interest payments on the above debt amounted
to approximately $54,000 in 1999, $64,000 in 1998, and $77,000 in 1997,
respectively.
The Company's various debt agreements contain certain restrictive covenants
that, among other things, restrict the payment of dividends, rent commitments,
additional indebtedness and prohibit issuance or redemption of capital stock and
require maintenance of certain financial ratios.
NOTE 3--INCOME TAXES
Subsequent to the completion of the Company's public offering in April 1996,
the Company files separate federal and state income tax returns. The net
operating loss carryforwards that were available at December 31, 1995 were
utilized prior to the completion of its public offering.
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
F-12
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 3--INCOME TAXES--CONTINUED
DECEMBER 31,
---------------------------
1999 1998
-------- --------
Deferred tax liabilities:
Depreciation $ 25,000 $ --
--------- --------
Total deferred tax liabilities 25,000 --
Deferred tax assets:
Depreciation and amortization --- 11,000
Accrued expenses 26,000 15,000
Bad debt allowance 96,000 54,000
--------- --------
Subtotal 122,000 80,000
State net operating loss carryforward 100,000 ---
--------- --------
Total deferred tax assets 222,000 (80,000)
Valuation allowance for deferred tax assets (197,000) (80,000)
--------- --------
Net deferred tax asset 25,000 ---
--------- --------
Net deferred taxes $ --- $ ---
========= ========
A valuation allowance has been provided that fully offsets the deferred tax
asset recorded at December 31, 1998 as management believes that it is more
likely than not that, based on the weight of the available evidence, the
deferred tax asset will not be realized.
Significant components of the income tax provision (benefit) are as follows:
1999 1998 1997
----------- ----------- -----------
Current:
Federal $ (324,720) $ (301,000) $ 1,488,000
State 32,258 40,162 235,000
----------- ----------- -----------
(292,462) (260,838) 1,723,000
Deferred --- 24,000 (24,000)
----------- ----------- -----------
(292,462) $ (236,838) $ 1,699,000
=========== =========== ===========
The reconciliation of income tax attributable to income (loss) before
income taxes computed at the U.S. federal statutory rate to income tax expense
(benefit) is:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Statutory tax rate (34%) applied to income (loss)
before income taxes $ (325,395) $ (149,943) $ 1,450,700
Adjustments due to:
State taxes, net of federal benefit 21,290 25,049 155,200
Change in valuation allowance 117,000 80,000 (17,300)
Benefits of net operating losses -- -- --
Non-deductible items 3,395 2,973 2,900
Prior year tax return accrual adjustment (108,752) (194,917) 107,500
----------- ----------- -----------
$ (292,462) $ (236,838) $ 1,699,000
=========== =========== ===========
</TABLE>
Income tax payments were approximately $223,000 in 1999, $1,162,000 in 1998
and $50,000 in 1997.
F-13
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 4--TRANSACTIONS WITH PARENT
The Parent provides certain financial and administrative services to the
Company. Central operating costs are charged on the basis of direct usage, when
identifiable, or on the basis of time spent. In the opinion of management, this
method of allocation is reasonable. The amount of expenses allocated by the
Parent totaled approximately $200,000 for the year ended December 31, 1999 and
$240,000 for each of the years ended December 31, 1998 and 1997.
As of December 31, 1999 and December 31, 1998, the Company had an
intercompany advance receivable from the Parent of approximately $105,000 and
$121,000, respectively, which bore interest at the short-term Treasury Bill
rate. Interest income on the intercompany advance receivable amounted to
approximately $2,000 and $1,000 for the years ended December 31, 1999 and
December 31, 1998, respectively. Interest on an intercompany advance payable
amounted to approximately $6,000 and $7,000 for the years ended December 31,
1998 and December 31, 1997, respectively. Interest is included in the
intercompany advance balance. The Company has agreed not to require repayment of
the intercompany advance receivable from the Parent prior to January 1, 2001,
and therefore, the advance has been classified as long-term at December 31,
1999.
NOTE 5--OTHER RELATED PARTY TRANSACTIONS
For the years ended December 31, 1999, 1998 and 1997, respectively, the
Company paid premiums of approximately $161,000, $124,000 and $87,000 for
insurance obtained through two persons, one a director of the Company and the
Parent, and the other a relative of an officer and director of the Company and
the Parent.
For the years ended December 31, 1999, 1998 and 1997, respectively, legal
fees of $132,000, $80,000 and $61,000 were paid to an attorney who acts as
general counsel and Secretary for the Company and the Parent.
NOTE 6--STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as is
discussed below, the alternative fair value accounting provided for under
Financial Accounting Standard Board Statement No. 123 "Accounting for
Stock-Based Compensation," requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, because the
exercise price of the Company's stock options equals the market price of the
underlying stock on the date of grant, no compensation expense was recognized.
In November, 1995, the Company adopted a stock option plan for up to 250,000
options. Pursuant to this plan, in November, 1995, the board of directors
granted 210,000 options to certain of its officers, directors, and employees and
consultants of which 4,500 options were outstanding at December 31, 1999. These
options vested immediately and are exercisable for a period of five years
through November 9, 2000 at $1.50 per share. On June 10, 1998, the board of
directors granted an option under the 1995 plan to a new board member for 5,000
shares exercisable at $2.25 per share through June 9, 2003. On December 31, 1997
162,500 options were exercised by officers for which the Company received cash
payments of the par value and the Company forgave the remaining balance due and
recorded compensation expense of approximately $322,000.
F-14
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 6 --STOCK OPTIONS--CONTINUED
In April 1999, the Company adopted a stock option plan pursuant to which the
board of directors granted 800,000 options exercisable at $1.25 per share to
certain of it officers, directors, employees and consultants with 340,000
options exercisable through April 20, 2000 and 460,000 options exercisable
through April 20, 2004. The Company recorded expense of $153,000 on 340,000 of
these options pursuant to FAS 123 and APB 25.
Pro forma information regarding net income and earnings per share is
required by FAS 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that Statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for options granted/modified during 1999 and 1998, respectively:
risk-free interest rate of 5.65% for the 1999 options and 5.55% for the options
granted/modified during 1998; no dividend yield; volatility factor of the
expected market price of the Company's common stock of .95 and .93, and a
weighted-average expected life of 1.9 years and 2.0 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective input assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of options
is amortized to expense over the options' vesting period, and since the options
vested immediately, the Company's pro forma disclosure recognizes expense upon
issuance of the options. No pro forma information is provided for 1997 as no
options were granted. The Company's pro forma information follows:
1999 1998
---- ----
Pro forma net loss $(985,759) $(209,039)
========= =========
Pro forma loss per share $ (.28) $ (.06)
========= =========
A summary of the Company's stock option activity, and related information
for the options issued in 1998, 1996 and 1995 follows:
F-15
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 6--STOCK OPTIONS--Continued
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of year 19,500 29,000 209,000
Granted 800,000 $1.25 10,000 $2.25 --
Cancellations -- (5,000) 4.75 --
Exercised -- -- (162,500) $1.50
Expired (10,000) 3.50 (14,500) 1.50 (17,500) 2.43
-------- -------- --------
Outstanding-end of year 809,500 19,500 29,000
======== ======== ========
Outstanding and exercisable
at end of year
April 1999 options 800,000 1.25 -- --
November 1995 options 4,500 1.50 4,500 1.50 19,000 1.50
August 1996 and June 1998 options 5,000 2.25 10,000 2.25 10,000 4.75
August 1996 options -- 5,000 4.75 --
-------- -------- --------
809,500 19,500 29,000
======== ======== ========
Weighted-average fair value of
options granted during the year $ .59 $ .79
======== ========
</TABLE>
The remaining contractual life at December 31, 1999 is .3 years for 340,000
options issued in April 1999, 4.3 years for 460,000 options issued in April
1999, 3.4 years for the options issued in June 1998, and .9 years for the
options issued in November 1995.
The Company has 3,409,500 shares reserved for future issuance, including:
2,300,000 shares for Warrants; 9,500 shares under the 1995 plan; 800,000 shares
under the 1999 plan; and 300,000 shares for underwriter options.
NOTE 7--COMMON STOCK
Pursuant to a 1996 public offering 1,150,000 shares of common stock were
issued, including 150,000 shares from exercise of the underwriters overallotment
option, and 2,300,000 redeemable common stock purchase warrants to purchase one
common share each at an exercise price of $4.50 originally exercisable through
April 16, 1999 and extended to March 31, 2000. The underwriters received options
to purchase 100,000 units each consisting of one share of common stock and two
common stock purchase warrants, for a total of 100,000 shares of common stock
and 200,000 common stock purchase warrants, with the options exercisable at
$4.50 per unit from April 17, 1997 through April 16, 2001 with the underlying
warrants being substantially identical to the public warrants except that they
are exercisable at $5.40 per share.
F-16
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 8--COMMITMENTS
The Company has leases on facilities housing its dialysis operations. The
aggregate lease commitments at December 31, 1999 are approximately:
2000-$217,048; 2001-$202,784; 2002-$186,506; 2003-$166,584; thereafter-$71,215.
Total rent expense was approximately $173,000, $49,000 and $73,000 for the years
ended December 31, 1999, 1998 and 1997, respectively.
Effective January 1, 1997, the Company established a 401(k) savings plan
(salary deferral plan) with an eligibility requirement of one year of service
and 21 year old age requirement. The Company has made no contributions under
this plan as of December 31, 1999.
NOTE 9--SALE OF SUBSIDIARIES' ASSETS
On October 31, 1997, the Company concluded a sale ("Sale") of substantially
all of the assets of two of its 80% owned subsidiaries, Dialysis Services of
Florida, Inc. - Ft. Walton Beach ("DSF") (dialysis operations) and Dialysis
Medical, Inc. ("DMI") (Florida Method 2 home patient operations), and an
in-patient hospital service agreement of its 100% owned subsidiary, DCA Medical
Services, Inc. pursuant to an Asset Purchase Agreement. Consideration for the
assets sold was $5,065,000 consisting of $4,585,000 in cash and $480,000 of the
purchaser's common stock. The Company recorded a gain on the Sale of
approximately $2,747,000, representing a pre-tax gain of $4,431,000, net of
estimated income taxes of approximately $1,684,000, of which approximately
$537,000 of the net after tax gain relates to the 20% minority interest in two
of the subsidiaries whose assets were sold. In February 1998, the Company
acquired, in a transaction accounted for as a purchase, the remaining 20%
minority interests in two of the subsidiaries whose assets were sold. The
purchase price, totaled $625,000, which included one-half of the common shares
originally received as part of the consideration of the Sale. All of the common
shares were sold in September 1998 for approximately $253,000 resulting in a
gain of approximately $13,000.
The pro forma consolidated condensed financial information presented below
reflects the Sale as if it had occurred on January 1, 1997, accordingly,
revenues and expenses of the businesses sold have been excluded for the period
prior to the sale. For purposes of pro forma statement of operations
information, no assumption has been made that expenses have been eliminated
which were included in corporate expense allocations by the Company and its
Parent, to the business operations sold and which were included in the actual
results of operations of these businesses. Such expenses amounted to
approximately $125,000 for the year ended December 31, 1997. No assumption
has been included in the pro forma information as to investment income to be
realized from investment of the proceeds of the Sale.
The summary pro forma financial information, which excludes the gain on
the Sale and related income taxes, is not necessarily representative of what
the Company's results of operations would have been if the Sale had actually
occurred as of January 1, 1997.
SUMMARY PRO FORMA INFORMATION
Year Ended December 31, 1997
----------------------------
Total revenues $3,079,000
==========
Net loss $ (530,000)
===========
Loss per share:
Basic $(.15)
=====
Diluted $(.15)
======
F-17
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 10--REPURCHASE OF COMMON STOCK
In September 1998, the Company announced its intent to repurchase up to an
additional 300,000 shares of its common stock at current market prices after
having acquired 100,000 shares in June 1997 for approximately $206,000. The
Company repurchased 105,000 shares for approximately $109,000 during 1998. The
Company did not purchase any additional shares during 1999. All treasury shares
were cancelled during the second quarter of 1999.
NOTE 11--CAPITAL EXPENDITURES
Capital expenditures were as follows:
1999 1998 1997
---- ---- ----
$1,203,000 $1,149,000 $ 825,000
========== ========== ==========
NOTE 12--PROPOSED MERGER AND ACQUISITION
On October 20, 1999, the Company entered into an Agreement and Plan of
Merger with MainStreet IPO.com Inc. ("MSI") and its wholly-owned subsidiary,
MainStreet Acquisition Inc. ("MainStreet"). The proposed merger is anticipated
to be effected by MainStreet merging into DCA with DCA surviving, changing its
name to MainStreet, and becoming a wholly-owned subsidiary of MSI. The
Company's shareholders will receive, on a one-for-one basis, shares of common
stock of MSI, which company filed a registration statement in February 2000
with the SEC covering the issuance of approximately 1,396,000 shares of its
common stock, plus approximately 3,419,000 shares for resale by certain
affiliates of the Company, MSI and certain private investors of MSI. The
Company will issue a proxy statement which is part of MSI's registration
statement, seeking its minority shareholders' approval of the merger and
related transactions, at such time the SEC declares the registration effective.
Immediately prior to the proposed merger, the Company will be selling all of
its assets to Dialysis Acquisition Corp., a wholly-owned subsidiary of its
parent, Medicore, Inc., with this subsidiary also assuming all liabilities of
the Company. The proposed sale of assets and merger transactions are subject to
a variety of contingencies, most importantly shareholder approval. Should the
Company's minority shareholders approve the transactions, Medicore will own
100% of the dialysis operations, and the Company's shareholders will become
shareholders of MSI.
MSI is a recently established company which has developed a central website
to provide business entities with the necessary tools to perform direct public
offering of their securities. Another company, CEO Letter, LLC, which will
become a wholly-owned subsidiary of MSI at the time of the merger, provides
chief executive officers of public companies the forum to discuss their
companies to the multitude of potential internet investors.
NOTE 13--LOAN TO PARENT COMPANY
On January 27, 2000, the Company's Parent acquired a 6% interest
in Linux Global Partners, a private holding company investing in Linux
software companies, and loaned Linux Global Partners $1,500,000 with a 10%
annual interest rate. The Parent obtained an option to acquire an additional
2% interest in and to loan $500,000 more to Linux Global Partners, which 2%
interest it acquired and additional loan it made on March 27, 2000. The Parent
borrowed the funds it utilized for the loan from the Company with an annual
interest rate of 10%. The companies in which Linux Global Partners invests
intend to use Linux IPO.com, Inc. website for any of their future public
offerings. Linux IPO.com is a 50% owned subsidiary of Linux Global Partners,
with 50% owned by MainStreet.
The Parent, issued options to purchase 150,000 shares of its common stock to
MSI and 2 officers of MSI as a finder's fee in conjunction with Medicore's
investment in Linux Global Partners.
F-18
September 13, 1999
Joseph Dillon & Company, Inc. Continental Stock Transfer & Trust Company
107 Northern Boulevard 2 Broadway
Great Neck, New York 11021 New York, New York 10004
RE: Amendment No. 2 to Warrant Agreement
Gentlemen:
This letter agreement represents Amendment No. 2 to the Warrant Agreement
between Joseph Dillon & Company, Inc. ("Dillon"), Continental Stock Transfer
& Trust Company (the "Warrant Agent"), and Dialysis Corporation of America
(the "Company"), dated April 16, 1996, between and among the parties, and
amended on March 9, 1999 (the "Warrant Agreement"), to further extend the
exercise period of the Warrants to March 31, 2000. This Amendment No. 2
amends Section 2 of the Warrant Agreement as amended on March 9, 1999 by
extending the exercise period of the Warrants to March 31, 2000. Any and
all other provisions of the Warrant Agreement indicating the expiration of
the term being October 16, 1999 are hereby amended to read March 31, 2000.
The Warrants and the Warrant Agreement as previously modified will
otherwise remain the same and in full force and effect in accordance with
their terms.
Very truly yours,
DIALYSIS CORPORATION OF AMERICA
/s/ Thomas K. Langbein
By:--------------------------------
THOMAS K. LANGBEIN, Chief
Executive Officer
Dated: September 10, 1999
Acknowledged and agreed to:
Joseph Dillon & Company, Inc. Continental Stock Transfer & Trust Company
/s/ Steven Jaloza /s/ William F. Seegraber, Vice President
By:-------------------------------- By:------------------------------------
STEVEN JALOZA, CEO William F. Seegraber, Vice President
Dated: September 10, 1999 Dated: September 10, 1999
1999 STOCK OPTION PLAN
OF
DIALYSIS CORPORATION OF AMERICA
__________
1. Purpose. DIALYSIS CORPORATION OF AMERICA, a Florida corporation,
-------
(the "Company") hereby establishes the 1999 Stock Option Plan (the "Plan").
The purpose of the Plan is to advance the interests of the Company and its
stockholders by providing a means by which the Company and its subsidiaries
("Affiliates") shall be able to attract, retain and reward competent
officers, directors, consultants, key employees (including officers and
directors who are employees), attorneys, advisors and others ("Partici-
pants"), and provide such persons with an opportunity to participate in
the increased value of the Company which their effort, initiative, and
skill have helped and will help to produce. The Plan and granting of
options shall encourage those persons to have a proprietary interest in
the Company and to provide their continued efforts.
This Plan authorizes the "Committee" or the "Board" to grant "Incentive
Options" to "Key Employees" and to grant "Non-Qualified Options" to "Key
Employees" and to "Key Individuals" selected by the Committee or the Board
while considering such criteria as employment position or other relationship
with the Company, duties and responsibilities, ability, productivity, length
of service or association, interests of the Company and other matters.
2. Definitions.
-----------
2.1 The following terms, whenever used in this Plan, shall have the
meanings set forth below.
(a) "Affiliate" means any corporation, a majority of the voting
stock of which is directly or indirectly owned by the Company.
(b) "Affiliation" or "Affiliated" means any person who has a
relationship with or is otherwise then affiliated with the Company as a
Participant; the absence or cessation of the designation as Participant
shall mean that such person no longer has an Affiliation or is Affiliated
with the Company or an Affiliate.
(c) "Award" means a grant made under this Plan in the form of
Incentive Options or Non-Qualified Options.
(d) "Board" means the Board of Directors of the Company.
(e) "Code" means the Internal Revenue Code of 1986, as amended.
(f) "Committee" means a committee appointed by the Board.
(g) "Company" means Dialysis Corporation of America and its
Affiliates unless the context otherwise indicates.
<PAGE>
(h) "Exercise Price" shall mean the price per Share of Stock at
which an Option may be exercised.
(i) "Fair Market Value" of a Share as of a specified date shall
mean the closing price of a Share on the Nasdaq National Market or the
principal securities exchange on which such Shares are traded on the day
immediately preceding the date as of which Fair Market Value is being
determined, or on the next preceding date on which such Shares are traded
if no Shares were traded on such immediately preceding day; or if the
Shares are not traded on the Nasdaq National Market or a securities
exchange, Fair Market Value shall be deemed to be the average of the high
bid and low asked prices of the Shares in the over-the-counter market on
the day immediately preceding the date as of which Fair Market Value is
being determined or on the next preceding date on which such high bid and
low asked prices were recorded. If the Shares are not publicly traded,
Fair Market Value shall be determined by the Committee or the Board, taking
into consideration all factors it deems appropriate, including, without
limitation, recent sale and offer prices of the Stock in private transac-
tions negotiated at arm's length. In no case shall Fair Market Value be
less than the par value of the Stock.
(j) "Incentive Options" means "incentive stock options" as that
term is defined in the Code Section 422, Section 422A, or the successor to
either of them.
(k) "Key Employee" means any person designated by the Committee who
is employed by the Company and whose continued employment is considered to be
in the best interests of the Company.
(l) "Key Individual" means any person, other than an employee of
the Company, who is committed to the interests of the Company or its
Affiliates.
(m) "Non-Qualified Options" mean Options that are not meant to
qualify as "incentive stock options" under Code Section 422, Section 422A,
or the successor of either of them.
(n) "Option" means a right to purchase Stock granted pursuant to
the terms and conditions of a Stock Option Agreement or Stock Option
Certificate.
(o) "Option Shares" means the shares of Stock underlying an Option
granted pursuant to the Plan.
(p) "Participant" means a person designated by the Board or the
Committee to receive an Award under the Plan who has a relationship with or
is otherwise then Affiliated with the Company as either an officer or
director, including Key Employees and Key Individuals.
(q) "Plan" means this 1999 Dialysis Corporation of America Stock
Option Plan, as amended from time to time.
(r) "Share" means a share of Stock adjusted in accordance with
Section 14 of the Plan (if applicable).
(s) "Stock" means the common stock, $.01 par value per share, of
the Company.
<PAGE> 2
(t) "Successor" means the legal representative of the estate of a
deceased Participant or the person or persons who may acquire the right to
exercise an Option or to receive Shares issuable in satisfaction of an Award,
by bequest or inheritance.
(u) "Term" means the period during which an Option may be exercised.
2.2 Gender and Number. Except when otherwise indicated by context,
-----------------
reference to the masculine gender shall include, when used, the feminine
gender and any term used in the singular shall also include the plural.
3. Administration. The Plan shall be administered by the Board;
--------------
provided, to the extent the Board deems it advisable or the law requires
the same, the Board may appoint a Committee consisting of not less than
three (3) members to administer the Plan. The Board may from time to time
remove members from, or add members to, the Committee. Vacancies on the
Committee, however caused, shall be filled by the Board. Hereinafter all
references in this Plan to the Board with respect to the administration of
the Plan shall mean the Committee upon the formation of such Committee.
Subject to the provisions of the Plan, the Board shall determine the indi-
viduals to whom and the time or times at which Options shall be granted,
the number of Shares to be subject to each Option, and the Term of any
such Option, whether such options shall be "Incentive Options" or "Non-
Qualified Options", and shall determine other terms and provisions of the
respective Options, which may or may not be identical, including but not
limited to restrictions that may be imposed on the Options and Shares and
the nature of such restrictions. The Board shall also interpret the Plan,
prescribe, amend and rescind rules and regulations relating to the Plan,
and make all other determinations necessary or advisable for the adminis-
tration of the Plan. The determinations of the Board shall be made in
accordance with its judgment as to the best interests of the Company and
its stockholders and in accordance with the purposes of the Plan. A
majority of members of the Board shall constitute a quorum, and all
determinations of the Board shall be made by a majority of its members.
Any determination of the Board under the Plan may be made, after the
consultation of the entire Board, without notice or meeting of the Board,
by a writing signed by a majority of the Board.
The Board may authorize the modification, extension or renewal of any
Option outstanding under the Plan, or accept the exchange of outstanding
Options (to the extent not theretofore exercised) for the granting of new
Options in substitution therefor, when, and subject to such conditions, as
are deemed to be in the best interests of the Company and in accordance
with the purposes of the Plan, provided notwithstanding the foregoing, no
such modifications of an Option shall, without the consent of the Optionee,
alter or impair any rights or obligations under any Option theretofore
granted under the Plan.
No member of the Board shall be liable for any action or determination
made in good faith with respect to the Plan or any Option granted under it.
4. Shares Available Under the Plan. The number of Shares available for
-------------------------------
distribution under this Plan shall not exceed 800,000 Shares (subject to
adjustment in accordance with Section 14 hereof). These Shares may consist,
in whole or in part, of authorized but unissued Stock or treasury Stock not
reserved for any other purpose. Any Shares subject to the terms and
conditions of an Award under this Plan which are not used because the terms
and conditions of the Award are not met or the Options granted under the
Plan shall expire or terminate for any reason without having been exercised
in full or shall cease for any reason to be exercisable in whole or in part,
the unpurchased Shares subject to such Option may again be used for an Award
under the Plan.
<PAGE> 3
5. Participation. Participation in the Plan shall be limited to
-------------
Participants of the Company selected by the Board. Participation is entirely
at the discretion of the Board, and is not automatically continued after an
initial period of Participation or Affiliation.
Incentive Options may be granted only to Key Employees. Non-Qualified
Options may be granted to both Key Employees and Key Individuals. Key
Employees and Key Individuals may hold more than one Option under the Plan
and may hold Options under the Plan as well as options granted pursuant to
other plans or otherwise.
6. Stock Options.
-------------
6.1 Agreements. An Award of an Option shall be evidenced by a Stock
----------
Option Certificate in such form and not inconsistent with the Plan as the
Board shall approve from time to time, which shall include the following
terms and conditions:
(a) Type of Option; Number of Shares. A statement identifying
--------------------------------
the Option represented thereby as an Incentive Option or a Non-Qualified
Stock Option and the number of Shares to which the Option applies and
shall provide for adjustment in accordance with the provisions of Section
14 hereof.
(b) Option Price. A statement of the Exercise Price for the
------------
Stock subject to the Option.
(c) Exercise Term. A statement of the Term of each Option granted
-------------
as established by the Board, subject to earlier termination as provided in
Sections 6.2 and 6.3 of the Plan, and provided that no Option shall be
exercisable after five years from the date of grant.
(d) Payment for Shares. A statement that the Exercise Price shall
------------------
be payable in cash in full at the time of exercise.
(e) Nontransferability. Each Stock Option Certificate shall state
------------------
that the Option is not transferable other than by will or the laws of descent
and distribution or a Change in Control of the Company as provided in Section
8 hereof, and during the lifetime of the Participant is exercisable only by
him or by his guardian or legal representative; or to the extent approved by
the Board, pursuant to a qualified domestic relations order as defined by
the Code, or the rules thereunder. No Option granted hereunder may be
pledged or hypothecated, nor shall any such Option be subject to execution,
attachment or similar process.
(f) Rights as a Shareholder. An Optionee shall have no rights as
-----------------------
a shareholder with respect to any Shares covered by his Option until the date
of the issuance of a stock certificate for such Shares. No adjustment shall
be made for dividends (ordinary or extraordinary, whether in cash, securities
or other property) or distributions or other rights for which the record date
is prior to the date such stock certificate is issued, except as provided in
Section 14.
6.2 Termination of Affiliation Due to Death, Disability, or Retirement.
------------------------------------------------------------------
If a Participant ceases Affiliation with the Company or an Affiliate by
reason of his death, permanent disability or retirement at or after age 65
all Options outstanding shall remain exercisable for a period of nine (9)
months from such death, disability or retirement, but not beyond the expira-
tion date of said Options. If
<PAGE> 4
the termination of Affiliation is due to retirement, then any vesting period
as provided in the Stock Option Certificate, if not then completed, shall
continue during such nine (9) month period commencing from the retirement
date. If termination of Affiliation is due to death or permanent disability
of the Participant, all such Participant's Options shall become fully
exercisable. For this purpose, Affiliation will be treated as continuing
intact while the Participant is on sick leave or other bona fide leave of
absence, to be determined in the sole discretion of the Board.
6.3 Termination of Affiliation for Reasons Other Than Death, Disability
-------------------------------------------------------------------
or Retirement. Except as otherwise determined by the Board:
- -------------
(a) In the event a Participant ceases Affiliation with the Company
voluntarily or involuntarily, except for the involuntary termination for
cause, death, retirement or permanent disability, if there is a vesting
period, then any Shares not vested to the date of such termination shall
be forfeited; and, in any event, the Participant shall have thirty (30)
days from such termination to exercise the Option, to the extent of Shares
then vested, at the Exercise Price.
(b) In the event a Participant ceases Affiliation with the Company
by involuntary termination for cause, the Option shall immediately be null
and void, notwithstanding the extent of Shares then vested.
"Voluntary termination" means cessation of Affiliation with the Company
based upon free choice or free will for whatever reason. Free choice and
free will remain free choice and free will and shall not be affected or
deemed involuntary due to the nature of working conditions, salary, personal
relationships, the outlook for the Company or its business or similar reasons.
"Involuntary termination for cause" includes (i) conviction of a felony, (ii)
willful failure to carry out the policies and directives of management and/or
the Board of Directors, (iii) breach of any agreement, representation or
covenant with the Company, (iv) engaging, alone or with others, in felonious
or other dishonest acts or practices, or (v) non-performance of the Optionee's
obligations and responsibilities to the Company or not acting in the best
interests of the Company.
(c) If the Option is an Incentive Option, no Stock Incentive Option
or Stock Option Certificate shall:
(i) permit any Optionee to exercise any Incentive Option more
than three (3) months after the date the Optionee ceased to be employed by
the Company if the reason for the Optionee's cessation of employment was
other than his death or his disability (as such term is defined by Section
105(d) (4) of the Code); or
(ii) permit any Optionee to exercise any Incentive Option more
than nine (9) months after the date the Optionee ceased to be employed by
the Company if the reason for the Optionee's cessation of employment was the
Optionee's disability (as such term is defined by Section 105(d)(4) of the
Code); or
(iii) permit any person to exercise any Incentive Option more
than nine (9) months after the date the Optionee ceased to be employed by
the Company if either (A) the reason for the Optionee's cessation of employ-
ment was his death or (B) the Optionee died within three (3) months after
ceasing to be employed by the Company; or
<PAGE> 5
(iv) permit the Exercise Price of an Incentive Option, which
shall be determined by the Board at the time of grant, to be less than one
hundred percent (100%) of the Fair Market Value of a share of Stock on the
date the Option is granted; provided, however, that if a Key Employee to whom
an Incentive Option is granted owns more than 10% of the total combined
voting power of all classes of shares of the Company at the time of the
grant, the Exercise Price per share of Stock shall be determined by the
Board but shall not be less than one hundred ten percent (110%) of the Fair
Market Value of a share of Stock on the date the Option is granted. The
Exercise Price per share of Stock under each Option granted pursuant to the
Plan which is not an Incentive Option shall be determined by the Board at
the time of grant but shall not be less than one hundred percent (100%) of
the Fair Market Value of a share of Stock on the date the Option is granted,
unless the Board shall have approved a lower percentage with respect to such
Option. The day on which the Board approves the granting of an Option shall
be deemed for all purposes hereunder the date on which the Option is granted.
6.4 Acceleration of Vesting and Exercise Due to Change in Control or
----------------------------------------------------------------
Registration of the Shares.
- --------------------------
If there is any vesting period, then:
(a) Should the Company file a Form S-8 registration to cover the
Options or Shares, for which registration there is no present intent, on
the effective date of such registration the Shares shall immediately fully
vest and the Options shall become fully exercisable.
(b) Change in Control, as provided in Section 8 hereof, shall
also provide for full exercisability of the Option.
7. Termination of Affiliation. Transfers of employment or director-
--------------------------
ships, or as consultant, advisor or attorney between the Company and an
Affiliate, or between Affiliates, will not constitute termination of
Affiliation for purposes of any Award.
8. Change in Control. Upon the occurrence of any Change in Control
-----------------
through an Acquiring Person, Reorganization or Board Change as set forth
herein, all Options granted under the Plan shall be fully exercisable and
the Company or surviving entity shall immediately redeem all outstanding
Options for cash in an amount equal to the excess of the greater of (i) the
price per Share paid in such acquisition by Acquiring Person or in such
Reorganization, or (ii) the highest Fair Market Value of the Stock during
ten (10) days following a public announcement that an Acquiring Person has
acquired the requisite beneficial ownership of the outstanding Stock or ten
(10) days following the commencement of or announcement of an intention to
make a tender offer or exchange offer the consummation of which would result
in the requisite beneficial ownership by an Acquiring Person, or (iii) the
Fair Market Value upon a Change in the Board, over the Exercise Price.
8.1 Acquiring Person. Any person or group of Affiliated or associated
----------------
persons, other than present management, its parent, or Optionees, who have
acquired beneficial ownership of twenty-five (25%) percent or more of the
outstanding Shares, or who commence, or announce an intention to make a
tender offer or exchange offer the consummation of which would result in
the beneficial ownership by a person or group of twenty-five (25%) percent
or more of such outstanding Shares, and such acquisition is completed.
<PAGE> 6
8.2 Reorganization. A reorganization shall mean that substantially all
--------------
of the assets of the Company are acquired by another person or entity other
than the existing Board (see Section 8.3) or a reorganization involving the
acquisition of the Company by another or its merger or consolidation with
another. The Reorganization shall be deemed to have occurred upon consumma-
tion or the reorganization transaction.
8.3 Board Change. Board Change shall be the date that a majority of
------------
the Board shall be persons other than persons (a) for whose election proxies
shall have been solicited by the Board, or (b) who are then serving as
directors appointed by the Board to fill vacancies on the Board caused by
death or resignation (but not by removal) or to fill newly created
directorships.
Within ten (10) days of such Change in Control, the Company, Acquiring
Person or successor, as the case may be, shall give written notification to
the Participant of such redemption of the Options. The Participant shall
have the right to elect to keep the Options by written notification to the
Company, Acquiring Person, or successor, as the case may be, within five (5)
days of the redemption notification by virtue of any Change in Control.
Notwithstanding anything herein to the contrary, the Options shall continue
in full force and effect upon such Change in Control if elected to be kept
by the Participant even if subsequent to but by virtue of such Change in
Control the Participant no longer has an Affiliation. Such Options shall
thereafter terminate as otherwise provided in the Plan.
9. Exercise of Option. Subject to the provisions of Section 6 to 8,
------------------
each Award under the Plan shall be exercisable as follows:
9.1 Vesting. The Option shall be either fully exercisable on the date
-------
of grant or shall become exercisable thereafter in such installments as the
Board may specify.
9.2 Full Vesting of Installments. Once an installment becomes
----------------------------
exercisable it shall remain exercisable until expiration or termination of
the Option, unless otherwise specified by the Board.
9.3 Partial Exercise. Each Option may be exercised at any time or
----------------
from time to time, in whole or in part, in accordance with its terms, for up
to the total number of Shares with respect to which it is then exercisable.
9.4 Acceleration of Vesting. The Board shall have the right to
-----------------------
accelerate the date of exercise of any Award.
10. Effective Date of the Plan. The Plan was adopted by the Board and
--------------------------
stockholders as of April 21, 1999. The Plan shall expire at the end of the
day on April 20, 2019 (except as to Options outstanding on that date).
11. Right to Terminate Affiliation. Nothing in the Plan shall confer
------------------------------
upon any Participant the right to continue Affiliation with the Company or
affect any right which the Company may have to terminate such Affiliation of
the Participant.
12. Withholding Taxes. The Company shall have the right to deduct from
-----------------
all payments under this Plan, whether in cash or in Stock, an amount necessary
to satisfy any federal, state or local withholding tax requirements.
<PAGE> 7
13. Amendment, Modification and Termination of the Plan. The Board may
---------------------------------------------------
at any time terminate, suspend, amend or modify the Plan in any respect at
any time, except that the Board will not, without authorization of the
stockholders of the Company obtained within 12 months before or after the
Board adopts a resolution authorizing the effectuation of any change (other
than through adjustment for changes in capitalization as provided in Section
14) which will:
(a) Materially increase the total amount of Stock which may be awarded
under the plan.
(b) Materially decrease the benefits accruing to Participants under the
Plan;
(c) Change the class of Participants eligible to participate in the Plan.
(d) Extend the duration of the Plan.
No termination, suspension, amendment or modification of the Plan will
adversely affect any right acquired by any Participant or any Successor under
an Award granted before the date of termination, suspension, amendment or
modification, unless otherwise agreed to by the Participant; but it will be
conclusively presumed that any adjustment for changes in capitalization
provided for in Section 14 does not adversely affect any right.
14. Adjustment for Changes in Capitalization. Upon the occurrence of
----------------------------------------
any of the following events, an Optionee's rights with respect to Options
granted to him hereunder shall be adjusted as hereinafter provided, unless
otherwise specifically provided in the Stock Option Certificate as per
Section 6.1:
14.1 Stock Dividends and Stock Splits. Any change in the number of
--------------------------------
outstanding Shares occurring through Stock splits, reverse Stock splits,
or Stock dividends after the grant of an Award will be reflected propor-
tionately in the aggregate number of Shares then available for Awards and
in the number of Shares subject to Awards then outstanding; and a propor-
tionate change will be made in the Exercise Price as to any outstanding
Options.
14.2 Consolidations or Mergers. If the Company shall be the surviving
-------------------------
corporation in any merger or consolidation, each outstanding Option shall
pertain and apply to the securities to which a holder of the number of
Shares subject to the Option would have been entitled.
14.3 Recapitalization or Reorganization. In the event of a
----------------------------------
recapitalization or reorganization of the Company (other than a transaction
described in Section 14.2 above) pursuant to which securities of the Company
or of another corporation are issued with respect to the outstanding shares
of Common Stock, an Optionee upon exercising an Option shall be entitled to
receive for the Exercise Price the securities he would have received if he
had exercised his Option prior to such recapitalization or reorganization.
14.4 Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, each Option will terminate
immediately prior to the consummation of such proposed action or at such
other time and subject to such other conditions as shall be determined by
the Board.
14.5 Issuances of Securities. Except as expressly provided herein, no
-----------------------
issuance by the Company of shares of Stock or any class, or securities
convertible into shares of Stock of any class, shall affect, and no adjust-
ment by reason thereof shall be made with respect to, the number or price
of Shares
<PAGE> 8
subject to the Options. No adjustments shall be made for dividends paid in
cash or in property other than securities of the Company.
14.6 Fractional Shares. No fractional shares shall be issued under the
-----------------
Plan and any fractional Shares resulting from adjustments as provided herein
will be rounded to the nearest whole Share.
14.7 Adjustments. Upon the happening of any of the events described in
-----------
Sections 14.1, 14.2 or 14.3 above, the class and aggregate number of Shares
set forth in Section 4 hereof that are subject to Options which previously
have been or subsequently may be granted under the Plan shall also be
appropriately adjusted to reflect the events described in such subparagraphs.
The Board or the successor Board shall determine the specific adjustments to
be made under this Section 14 and, subject to Section 3, its determination
shall be conclusive.
14.8 Company's Right to Make Adjustments and Reorganizations. The grant
-------------------------------------------------------
of an Award pursuant to the Plan shall not affect in any way the right or
power of the Company to make adjustments, reclassifications, reorganizations
or changes of its capital or business structure or to merge or consolidate or
to dissolve, liquidate, sell or transfer all or any part of its business or
assets.
15. Securities Law Requirements. No Shares shall be issued upon the
---------------------------
exercise of any Option unless and until the Company has determined that (i)
it and the Participant have taken all actions required to register the
Shares under the Securities Act of 1933 or perfect an exemption from the
registration requirements thereof; (ii) any applicable listing requirement
of any stock exchange or Nasdaq National Market on which the Common Stock
is listed has been satisfied; and (iii) any other applicable provision of
state or federal law has been satisfied. The Company shall not be required
to issue or deliver any certificates for shares of Stock purchased upon the
exercise of an Option prior to (i) if requested by the Company, the filing
with the Company by the Participant of a representation in writing that it
is the Participant's then present intention to acquire the Stock being
purchased for investment and not for resale, and/or (ii) the completion of
any registration or other qualification of such shares under any government
or self-regulatory body, which the Company shall determine to be necessary
or advisable. Nothing herein is deemed nor shall be construed to confer
any registration rights upon the Participant for an Option or the Shares,
and no such registration right with respect to any Option or Share is
provided to any Participant by the Company.
16. Miscellaneous.
-------------
16.1 Proceeds. The proceeds received by the Company from the sale of
--------
the Shares pursuant to the exercise of the Option will be used for general
corporate purposes.
16.2 No Obligation to Exercise. The granting of an Award shall impose
-------------------------
no obligation upon the Participant to exercise the Option.
16.3 Means of Exercising Options. An Option (or any part thereof) shall
---------------------------
be exercised by giving written notice to the Company at its principal office
address. The notice shall identify the Option being exercised and specify
the number of Shares as to which such Option is being exercised, accompanied
by full payment of the Exercise Price therefor either (a) in United States
dollars in cash or by check, or (b) at the discretion of the Board, through
delivery of Shares having a Fair Market Value equal as of the date of the
exercise to the cash exercise price of the Option, (c) at the discretion of
the Board, by delivery of the Optionee's personal recourse note bearing
interest payable not less than annually at not less than 100% of the lowest
applicable Federal rate, as defined in Section 1274(d) of the
<PAGE> 9
Code, (d) at the discretion of the Board and consistent with applicable law,
through the delivery of an assignment to the Company of a sufficient amount
of the proceeds from the sale of the Stock acquired upon exercise of the
Option and an authorization to the broker or selling agent to pay that
amount to the Company, which sale shall be at the Optionee's direction at
the time of exercise, or (e) at the discretion of the Board, by any
combination of (a), (b), (c) and (d) above.
16.4 Governing Law, Construction. The validity and construction of the
---------------------------
Plan and the agreement evidencing Options shall be governed by the laws of
the State of Florida, or the laws of any jurisdiction in which the Company
or its successors in interest may be organized.
16.5 Incentive Options; Disqualifying Disposition. Notwithstanding
--------------------------------------------
that Stock issued upon exercise of an Incentive Option is sold within one
year following the exercise of such Incentive Option or within two years
of grant of the Incentive Option so that the sale constitutes a disquali-
fying disposition for Incentive Option treatment under the Code, no
provision of this Plan shall be construed as prohibiting such a sale.
16.6 Compliance with Code. The aspects of this Plan with respect to
--------------------
Incentive Options are intended to comply in every respect with Section 422
and Section 422A of the Code and the regulations promulgated thereunder.
In the event any future statute or regulation shall modify the existing
statute, the aspects of this Plan with respect to Incentive Options shall
be deemed to incorporate by reference such modification. Any Stock Option
Certificate relating to any Option granted pursuant to this Plan outstanding
and unexercised at the time any modifying statute or regulation becomes
effective shall also be deemed to incorporate by reference such modifica-
tion and no notice of such modification need be given to Optionee.
If any provision of the aspects of this Plan with respect to Incentive
Options is determined to disqualify the shares of Stock purchasable pursuant
to the Options granted under this Plan from the special tax treatment
provided by Code Section 422 or Section 422A, such provision shall be
deemed null and void and to incorporate by reference the modification
required to qualify the shares of Stock for said tax treatment.
STOCK OPTION CERTIFICATE
(Non-Qualified Stock Option)
This stock option is granted by
DIALYSIS CORPORATION OF AMERICA
to:
CERTIFICATE SHARES:
No.
Address:
in accordance with and pursuant to the terms of the 1999 Stock Option Plan
(the "Plan") of Dialysis Corporation of America, a Florida corporation (the
"Company").
The terms of the Plan are incorporated by reference and shall be
considered to be a part of this Stock Option Certificate. A copy of the Plan
is attached hereto.
The terms of the Stock Option granted to you include the following:
1. On April 21, 1999 the Board of Directors of the Company granted to the
Optionee an Option (the "Option") to purchase all or any part of an aggregate
of shares (the "Shares") of the Common Stock, $.01 par value (the
"Common Stock"), of the Company, at the price of $1.25 per share ("Exercise
Price"), subject to adjustment in accordance with the terms and conditions
set forth in the Plan, and subject to shareholder which was obtained on May
21, 1999.
2. This Option shall expire at 5:00 p.m., Florida time, on April 20,
2000, subject to earlier termination as provided in the Plan.
Should your affiliation with the Company terminate for any reason,
voluntary or involuntary, for cause or otherwise, or due to death, retirement
or disability, the exercisability of the Option and the extent of the
availability of the Shares shall be governed by Sections 6.2, 6.3, and 6.4
of the Plan.
Upon the occurrence of any Change in Control as defined in Section 8 of
the Plan, the Option shall continue to be fully exercisable, and the Company
or surviving entity shall redeem the Option for cash in an amount as
delineated in Section 8; provided, you have the right to keep the Option by
written notification to the Company, Acquiring Person or Successor, as the
case may be, within five (5) days of the redemption notification as provided
in Section 8 of the Plan. If you elect to keep the Option, it shall continue
in effect, even if your affiliation with the Company ceases by virtue of such
Change in Control.
3. This Option may be exercised by giving written notice to the Company
in the form attached hereto as Exhibit A stating the number of Shares to be
purchased and by concurrently tendering payment by check equal to the
Exercise Price for the Shares being purchased upon such exercise. Upon
exercise and payment, the certificate for the purchased Shares shall be
issued as soon as possible as fully-paid and non-assessable Shares.
4. This Certificate and the Options granted herein and the Shares
issubable upon exercise are not transferable by the Optionee otherwise than
by will or the laws of descent and distribution, and
<PAGE>
shall be exercised only by the Optionee, subject to certain rights of the
Optionee's legal representative, as provided in the Plan.
The Optionee acknowledges that he has no contractual right to require
the registration of the Option or the Shares; and the Optionee understands
that the Shares issued upon exercise of the Option shall have a legend on
the face thereof indicating the restrictions on transfer; and that such
Shares and the Option shall have stop transfer instructions issued against
the same.
At the time of any exercise of the within Option, the Optionee shall
represent to and agree with the Company in writing that he is acquiring the
Shares in respect of which the Option is being exercised for the purpose
of investment and not with a view to distribution.
The Company shall not be obligated to take any other affirmative action
in order to cause or facilitate the exercise of the Option or the issuance
of Shares pursuant thereto to comply with any state or federal law, rule or
regulation.
Any transfer in violation of this Section may cause termination of the
Option.
5. This Option shall be subject to exercise as provided herein and as
provided by the terms of the Plan and shall, in accordance with such terms,
be binding upon the Company and the Optionee.
6. This Certificate shall be governed by and construed in accordance
with the laws of the State of Florida.
IN WITNESS WHEREOF, Dialysis Corporation of America has hereunto set
its hand as of the 21st day of May, 1999.
DIALYSIS CORPORATION OF AMERICA
/s/ Bart Pelstring
By:--------------------------------
BART PELSTRING, President
OFFICE LEASE
Maintree Commons, Vineland, New Jersey
This Lease is made on May 10, 1999, by MAINTREE OFFICE CENTER, L.L.C., a
New Jersey limited liability company, ("Landlord"), whose address is c/o
David Lerman, 1138 E. Chestnut Avenue, Building 2, Suite B, Vineland, New
Jersey 08360 and DCA OF VINELAND, L.L.C. a New Jersey limited liability
company ("Tenant"), whose address is 1450 E. Chestnut Avenue, Building Two,
Suite , Vineland, NJ 08361.
----
1.1 Premises. The leased premises (the "Premises") consist of
--------
approximately 6,000 +/- square feet of space (Building Two , Suite ) in
----
Maintree Commons (the "Complex"), located at 1450 E. Chestnut Avenue, Vineland,
NJ. See Exhibit A attached. The Premises are measured from the exterior
surface of outside walls, and from the midline of interior walls separating
the Premises from adjoining space. The space size (and corresponding rent)
shall be determined and adjusted in connection with final plan approval
pursuant to Exhibit B attached.
2.1 Term. The initial term of this Lease is five (5) year(s). Tenant's
----
renewal options are as described in Paragraph 18.16 below.
2.2 Commencement Date. The lease term (and Tenant's obligation to pay
-----------------
rent) will begin on that date which is the earlier of: (i) one hundred twenty
(120) days after Landlord delivers the Premises to Tenant with Landlord's Work
described in Exhibit B substantially complete ( the "Delivery Date"); or (ii)
the date on which Tenant opens for business from the Premises. If, however,
Landlord is delayed in the delivery of the Premises because of Tenant's acts
or failure to act, the lease term and Tenant's obligation to pay rent shall
begin two hundred ten (210) days after this Lease is signed. Regardless of
the aforementioned, lease payment will not begin sooner than two hundred ten
(210) days from Lease signing or, when Tenant opens for business, whichever
comes first.
2.3 Delivery Date. The Delivery Date is estimated to occur within one
-------------
hundred twenty (120) days after the later to occur of: (i) the date on which
this lease is fully signed; or (ii) the date on which the City of Vineland
has issued a building permit (the "Estimated Delivery Date"). Landlord has
the right to extend the Delivery Date for a period of up to ninety (90) days
beyond the Estimated Delivery Date (the "Extended Delivery Date"). If
Landlord does not deliver the Premises to Tenant by the Extended Delivery
Date, Tenant has the right to notify Landlord in writing that this lease
shall be terminated if the Premises are not delivered to Tenant within
thirty (30) days after Tenant's notice. If such a termination occurs,
Landlord shall return any deposits or advance rental payments to Tenant, and
the parties shall be relieved of any further obligations to one another under
this Lease. Tenant's sole remedy and right in the case of Landlord's failure
to deliver the Premises is for Tenant to terminate the Lease.
Tenant shall not have the right to terminate this Lease if Landlord's
inability to deliver the Premises on time is due to delays attributable to
Tenant (for example, delays by Tenant in getting necessary permits or
approvals, or in submitting and getting Landlord's approval of Tenant's plans).
3.1 Minimum Annual Rent. Tenant will pay, as minimum annual rent
-------------------
("Minimum Rent"), the sum of Sixty Nine Thousand Six Hundred and no/100
Dollars ($69,600), payable in monthly installments of Five Thousand Eight
Hundred and no/100 Dollars ($5,800) each. These amounts are subject to
adjustment once the actual square footage of the Premises is determined in
connection with final plan approval. The Minimum Rent during the initial
lease term is based upon $11.60 per square foot.
3.2 Initial Payments. The first month's rent is to be paid when this
----------------
Lease is signed. All rent payments must be actually received by Landlord (or
Landlord's property manager, if applicable) on or before the first day of
each month. A late charge of up to five percent (5%) of the delinquent
payment may be assessed, at Landlord's option, if any, payment is not made
prior to the fifth (5th) day after that payment is first due. This late
charge is not a finance charge, but is intended to offset the additional
administrative burdens and costs incurred by Landlord in dealing with late
payments.
3.3 Minimum Rental Adjustment The Minimum Rent payment assumes that
-------------------------
real estate taxes (and/or "payments in lieu of real estate taxes" or other
similar changes), insurance, and operating expenses (all of the preceding
items being referred to collectively as the "Operating Expenses") applicable
to the Complex do not exceed the base operating amounts (the "Base Operating
Amounts") next described:
RE Taxes (and/or other Insurance & Other
Calendar Year similar charges) Operating Expenses
- ------------- ---------------------- ------------------
1999 $0.20 PSF $1.30 PSF
2000 $0.40 PSF $1.30 PSF
2001 $0.60 PSF $1.30 PSF
2002 $0.80 PSF $1.30 PSF
2003 $1.00 PSF $1.30 PSF
<PAGE> 1
In any year when they do, Landlord may charge Tenant, as additional rent,
Tenant's prorata share of the additional Operating Expenses. Tenant's payment
of the additional amount shall be due within thirty (30) days after Landlord
bills Tenant. For any year in which Landlord anticipates that Operating
Expenses will exceed the Base Operating Amounts, Landlord may increase the
monthly Minimum Rent payment to cover the anticipated additional expenses,
and that increased amount will be paid monthly by Tenant. Within ninety (90)
days after the end of each such year, Landlord will provide Tenant a
reconciliation statement for that year detailing Operating Expenses in excess
of the Base Operating Amounts. Within thirty (30) days after that reconcili-
ation statement is issued, Tenant will pay Landlord any additional sums due
from Tenant, or Landlord will credit Tenant any unused amounts.
3.4 Security Deposit. Tenant has paid Landlord a non-interest bearing
----------------
security deposit of N/A Dollars ($ N/A ), to secure Tenant's performance
of all its obligations under this Lease. Landlord may apply these funds to
the extent required for the payment of rent or other sums due from Tenant, or
for the payment of any amount which Landlord may be required to expend or for
any cost or loss which Landlord might incur because of Tenant's default. If
Tenant complies with all of the terms of this Lease, the security deposit not
applied pursuant to this paragraph shall be returned to Tenant within thirty
(30) days after the termination of this Lease. If any portion of the deposit
is so used or applied, Tenant shall, within ten (10) days after demand,
deposit cash with Landlord in an amount sufficient to restore the security
deposit to its original amount. If Landlord transfers its interest in the
Premises during the term of this lease, and if Landlord delivers to the new
owner the security deposit, Tenant shall look only to the new owner for the
return of its security deposit. The security deposit may not be used to pay
the last months' rent.
4.1 Initial Improvements; Landlord's Work; Tenant's Work. Landlord is
----------------------------------------------------
delivering the Premises in the condition described in Exhibit B attached. No
other representations have been made to Tenant regarding the condition of
the Premises, and no promises to alter, repair, improve or decorate the
Premises have been made to Tenant unless they are specifically described in
this Lease. If a list of Landlord's Work and Tenant's Work is included on
Exhibit B, each of the parties shall perform and pay for the work designated
as its work.
5.1 Possession and Use. The Premises shall be delivered to Tenant free
------------------
and clear of all prior tenancies. The Premises shall be used and occupied by
Tenant solely for the following type of Use [described]:
Medical outpatient clinic, dialysis facility and related storage and
- ------------------------------------------------------------------------------
support offices.
- ------------------------------------------------------------------------------
Tenant is responsible to confirm with the applicable governmental authorities
that such Use is permitted at the Premises. Tenant understands that certain
uses which otherwise might fall under the general category of "office use"
might not be uses which Landlord would want to include at the Complex. Tenant
also understands that Landlord is willing to permit the Use of the Premises by
this Tenant and for the limited and specific Use described above only.
Accordingly, Tenant shall not use, or permit the Premises to be used, for any
other purpose or purposes or under any other trade name whatsoever without the
prior written consent of Landlord, which may be granted or withheld by
Landlord in Landlord's sole, absolute discretion. Tenant will not use (or
permit the use of) the Premises for any purpose which would increase the cost
of insurance of the Premises, Building or Complex, or which would result in a
cancellation of or any exclusion to coverage under such insurance. Tenant also
will not use (or permit the use of) the Premises for any illegal purpose, and
will not cause or permit any nuisance or waste. Landlord has the right, from
time to time, to make reasonable rules and regulations regarding the Complex
and the Premises, and Tenant agrees to comply with those rules and regulations,
provided such does not materially interfere with the permitted Use. Addition-
ally, Tenant shall comply with the requirements of any governmental authority
which shall impose any duty regarding the Premises and/or its condition, use
or occupancy.
5.2 Quiet Enjoyment. Tenant, upon paying the rent and performing the
---------------
covenants in the Lease, shall and may peaceably and quietly have and enjoy
the Premises and the Common Areas in accordance with the terms and conditions
of this Lease.
5.3 Janitorial; Trash.
-----------------
A. Tenant is responsible to arrange and pay for cleaning and janitorial
work at the Premises.
B. Tenant also shall be responsible to arrange and pay for the disposal
of all of its trash and waste. All medical or other regulated waste shall
be maintained and disposed of in accordance with all applicable laws.
Paper and other trash and waste shall be placed in a dumpster to be
maintained by Tenant in a specially designated area to be agreed upon by
Tenant and Landlord as part of the final plan approval process described
in Exhibit B. In this connection:
(1) Tenant has indicated to Landlord that it would like to maintain
an eight (8) cubic yard dumpster in the vicinity of the "garage
option" portion of the Premises. Tenant understands that Tenant's
building plans will need to reflect a concrete curb and pad and
trash enclosure to be built and maintained by Tenant at Tenant's
expense. The location, size, design, materials, and other aspects
of the trash pad and enclosure, as well as the dumpster, are subject
to Landlord's approval. The trash enclosure shall conform as closely
as possible to the currently existing trash enclosures built by
Landlord at other locations in the Complex.
(2) Ordinarily, Landlord would be handling trash container management.
Because Tenant will be handling its own trash management, Tenant
agrees to comply with the reasonable requirements of Landlord
regarding housekeeping, frequency of removal, and such other matters
as Landlord may require pertaining to trash management, failing which
Landlord may take action on Tenant's behalf and at Tenant's expense.
Additionally, Tenant shall use the same trash contractor as is being
used by Landlord at the Complex (as the same may change from time to
time).
<PAGE> 2
(3) Tenant will receive from Landlord semi-annually a statement and
a credit for the portion of Tenant's prorata share of trash removal
expenses that otherwise would have been included as part of the
Minimum Rent.
6.1 Utilities. Tenant is responsible for all charges (use, connection
---------
or otherwise) for water, sewer, gas, electricity, telephone service, cable
and any and all other utilities or services at or to the Premises. See
Exhibit B (Landlord's and Tenant's Work) for description of utility
facilities. Tenant will pay its own costs directly, if a utility service is
separately metered, or will pay Landlord, as additional rent, within ten (10)
days after Landlord's issuance of a bill, for Tenant's share of any utility
service that is not separately metered.
7.1 Indemnity. (a) Tenant shall indemnify, defend and hold harmless
---------
Landlord against all claims, costs, expenses (including but not limited to
attorneys' fees, court costs, and litigation expenses), losses, damages, obli-
gations and liabilities ("Claims") arising solely out of the acts or
negligence of Tenant, its employees, agents, patients and/or other invitees
for the death or any injury, loss or damage caused to any person or property
that occurs in or about the Premises (except to the extent such Claims arise
solely from the negligence or intentional misconduct of Landlord, its
employees, or agents); (b) Landlord shall indemnify, defend and hold
harmless Tenant from all Claims arising solely out of the acts of Landlord
or its employees or agents, for death or any injury, loss or damage caused
to any person or property that occurs in any part of the Complex or in or
about the Premises (except to the extent such Claims arise from the
negligence or intentional misconduct of Tenant and/or its employees, agents,
patients or other invitees).
7.2 Tenant's Insurance. Before taking possession of the Premises, Tenant
------------------
will provide Landlord proof that Tenant has obtained (and throughout the lease
term, Tenant will maintain) the following types of insurance in form, content
and reasonably satisfactory to Landlord:
A. Public Liability and Property Damage. Comprehensive public liability
------------------------------------
insurance with coverage including personal injury, bodily injury, broad form
property damage, operations hazard, owner's protective coverages, contractual
liability and products and completed operations liability, in limits of not
less than One Million Dollars ($1,000,000.00) inclusive.
B. Property. Insurance covering all Tenant's improvements and all
--------
personal property at the Premises, in an amount not less than their full
replacement value, providing protection against any peril included within the
classification "Fire and Extended Coverage", together with insurance against
sprinkler leakage (if the Premises are sprinklered), vandalism and malicious
mischief. All property at the Premises shall be there at Tenant's sole risk.
C. Policy Forms. All policies shall name Landlord as an additional named
------------
insured. Executed copies of these policies shall be delivered to Landlord
prior to delivery of possession of the Premises to Tenant and thereafter
within thirty (30) days before the expiration of the term of each policy.
Tenant's property insurance shall waive subrogation by Tenant and its
insurer. All policies of insurance may not be canceled or amended except
upon thirty (30) days prior written notice from the insurance company to
Landlord.
7.3 Landlord's Insurance. At all times during the term of this Lease,
--------------------
Landlord shall maintain in effect a policy of insurance covering the building
of which the Premises are a part (but not Tenant's trade fixtures, merchan-
dise, inventory, equipment, furniture, personal property, or other items used
in Tenant's business) in an amount at least equal to eighty percent (80%) of
the agreed value replacement cost (exclusive of the cost of excavations,
foundations and footings) from time to time during the term of this Lease,
providing protection against any peril generally included within the
classification "Fire and Extended Coverage." Landlord also shall obtain
comprehensive public liability insurance pertaining to the Common Areas in
the amount of One Million dollars ($1,000,000).
7.4 Waiver of Subrogation. With respect to claims covered by the
---------------------
insurance which Tenant and Landlord are obligated by this Lease to maintain,
Landlord and Tenant waive the right each may have against the other on
account of any loss or damage occasioned to Landlord or Tenant, as the case
may be, their respective property, the Premises or its contents or to other
portions of the Complex, arising from any risk insured against by Landlord
or Tenant. The parties, each on behalf of their respective insurance
companies insuring the property of either Landlord or Tenant against any
such loss, waive any right of subrogation that it may have against Landlord
or Tenant, as the case may be. The release and waiver of subrogation rights
provided herein shall apply only if and to the extent that insurance
proceeds are in fact paid to or for the account of the party giving the
release.
8.1 Common Areas. This Lease includes the non-exclusive right to Tenant,
------------
its employees, and its guests, to use the common areas (e.g., driveways,
sidewalks, parking areas) provided for the general use of all tenants at the
Complex (the "Common Areas" ) as they exist from time to time. Landlord, in
Landlord's discretion, has the right to enlarge, reduce, modify and otherwise
make changes to the Common Areas, and to establish rules and regulations
regarding the use of the Common Areas. Any changes to the Common Areas, and
any rules and regulations regarding the use of the Common Areas, may not
preclude access to the Premises or substantially deprive Tenant of the use and
enjoyment of the Premises.
Landlord shall provide snow and ice management to the Common Areas
(including the sidewalks adjacent to Premises) and shall maintain lighting in
the Common Areas.
<PAGE> 3
9.1 Signs. Tenant shall have the right to add its name to the building
-----
directory indicating the occupants of the Building in which the Premises are
located. Tenant also may install its premises identification near Tenant's
entrance. All signs must have Landlord's prior written approval (which
approval shall not be unreasonably withheld), and must conform to Landlord's
sign criteria.
10.1 Alterations and Additions by Landlord. Landlord has the right at
-------------------------------------
any time to make expansions, additions, or alterations to all or any part of
the Complex.
10.2 Alterations and Additions by Tenant. No modifications, additions,
-----------------------------------
or improvements to the Premises may be made without Landlord's prior written
consent (including but not limited to the work, contractors, and materials),
Landlord's consent not to be unreasonably withheld. Additionally, all such
work shall be at Tenant's expense, shall not impair the safety or appearance
of the Premises or the Building, and shall be made according to all appli-
cable laws and regulations.
11.1 Repairs and Maintenance.
-----------------------
A. Landlord -- Except as otherwise provided in this Lease, Landlord
--------
is responsible to repair and maintain the roof, exterior
(excluding glass doors and windows) and structural components
of the Building of which the Premises are a part.
B. Tenant -- Except as otherwise provided in this Lease, Tenant is
------
responsible to repair and maintain:
(1) the interior, non-structural portion of the Premises
(including but not limited to wall surfaces and/or coverings,
floor coverings, window treatments, equipment, fixtures, light
bulbs, and other consumables);
(2) HVAC (heating, ventilating, and air-conditioning) system,
plumbing system, and electrical system pertaining to the Premises;
and
(3) everything pertaining to the Premises other than the items
specifically described in Paragraph 11.1.A. above as Landlord's
responsibility.
C. Tenant will not damage or injure the Premises, the Building, or the
Complex, and will pay the cost of repairing any damage or injury to the
Premises, Building, or the Complex by Tenant, its employees, agents, contrac-
tors or invitees. Additionally, notwithstanding Paragraph A. above, if any
repair or maintenance work for which Landlord otherwise would be responsible
is made necessary because of the actions or omissions of Tenant, its
employees, agents, contractors, or invitees, Tenant shall pay for such work
upon Landlord's request for payment.
D. At the end of the Lease term, Tenant shall return the Premises in
good condition and repair, subject only to normal wear and tear. At the end
of the Lease, Landlord shall have the option: (1) to keep any improvements
or additions made by Tenant, without any obligation to compensate Tenant;
and/or (2) to require that Tenant, at Tenant's expense, remove any "unusual"
additions or improvements made by Tenant, and repair any related or resulting
damages. For the purpose of this provision, "unusual additions or improve-
ments" means improvements not typically found in a business office or
typical medical office space. It does not mean or include sheetrock
partition walls, plumbing or sinks.
E. The term "repair and maintain" shall include replacement when
required to restore the Premises or any component to good working order or
condition.
11.2 Landlord's Entry Upon the Premises. Landlord may enter the
----------------------------------
Premises at reasonable times during normal business hours for the purpose
of inspection, showing the Premises to prospective purchasers, tenants,
investors, lenders, or others, making repairs, and performing any work
necessary to comply with any laws, rules or regulations of any public
authority, fire rating bureau or Landlord's insurer or that Landlord may
deem necessary or appropriate. Landlord also may enter the Premises at
reasonable times to inspect, effect repairs, maintain or remodel adjacent
premises. Any such entry shall be done with a minimum of two day prior
notice with the exception of emergencies and so as to cause minimum
inconvenience to Tenant, and Landlord shall cause any damage to the Premises
as a result of such entry, repairs, maintenance or remodeling to be repaired
promptly without cost to Tenant.
12.1 Assignment, Sublet, or Other Transfer.
-------------------------------------
A. Except as otherwise provided in Paragraph 12.1.B below, Tenant shall
not assign, sublet, or otherwise transfer the Lease or the Premises in whole
or in part without first obtaining the written consent of Landlord, which
consent shall not be unreasonably withheld. In considering Tenant's request
for consent to assignment, sublease, etc., Landlord may take into account,
among other things, the following:
(1) the financial strength and creditworthiness of the proposed trans-
feree;
(2) the business experience of the proposed transferee;
(3) the prior history and/or reputation of the proposed transferee, its
owners, officers, directors and shareholders;
(4) the use which the proposed transferee intends to make to make of the
Premises;
(5) such other legitimate business considerations that Landlord
reasonably deems appropriate.
Any attempted transfer, assignment or subletting without Landlord's written
prior consent shall be void and confer no rights upon any third party.
<PAGE> 4
B. So long as no change in scope, manner, or style of operation of the
Premises is involved, Tenant, without first having to obtain Landlord's
consent, may assign or sublet the Premises to (i) Tenant's medical director
and similar physician; (ii) any corporation or company which controls, is and
remains controlled by, or is and remains under common control with Tenant, or
to any corporation or company resulting from the merger or consolidation with
Tenant, or to any person or entity which acquires substantially all of the
assets of Tenant.
C. After any assignment, sublease, or other transfer permitted by
Landlord, Tenant nevertheless shall remain liable for all of its obligations
under this Lease.
13.1 Damage or Destruction; Condemnation. If the Premises or the
-----------------------------------
Building are damaged or destroyed, or are the subject of condemnation, and:
A. if the Premises are so affected that they are rendered materially
unsuitable for Tenant's Use and cannot be repaired or restored within one
hundred eighty (180) days, Tenant shall have the right to terminate this
Lease;
B. if the Premises and/or Building are not affected as described in A.
above, and Landlord elects to repair or restore, then and until Landlord's
repair/restoration work is substantially completed, Tenant's rent shall abate
in the same ratio that the square footage of the Premises rendered unusable
bears to the total square footage of the Premises;
C. if Landlord determines that it is infeasible, impractical, or
undesirable for Landlord to repair or restore, Landlord shall have the right
to terminate the Lease, in which case Tenant's obligations shall cease to
accrue under the Lease as of the date of the damage, destruction, or
condemnation taking.
D. All condemnation awards (other than that portion, if any, which may
be specifically awarded to Tenant for the loss of Tenant's improvements,
personal property, or relocation expenses) shall belong exclusively to
Landlord.
14.1 Tenant's Default. If Tenant defaults in the performance of any of
----------------
Tenant's obligations under the Lease, and Tenant's default is not cured
within the following notice and cure period: (a) failure to pay any sum due -
ten (10) days after written notice is sent by Landlord; (b) failure to
perform any other obligation - thirty (30) days after written notice is sent
by Landlord, Landlord shall have the right and option, in Landlord's sole
discretion, and without having to give further notice of any kind, to pursue
any one or more of the following remedies (as well as any other remedies
available to Landlord at law or equity):
A. Declare immediately due all accrued amounts as well as the entire
amount of all rent and other charges remaining to be paid for the balance of
the lease term, and sue to recover such amounts and to recover possession of
the Premises (together with such expenses as Landlord may incur in recovering
possession of the Premises, including but not limited to court costs,
litigation expenses, and attorneys' fees);
B. Enter upon and take possession of the Premises without terminating
this Lease, and without relieving Tenant of its obligation to pay the rent
and other payments required of Tenant under this Lease, and at Tenant's
expense: expel or remove Tenant and any other person who may be occupying
the Premises or any part thereof and any personal property or trade fixtures
located therein, and change or alter the locks and other security devices,
and relet the Premises in the name of Landlord or Tenant, at any rental and
for any term readily obtainable, and receive the rent therefor. In such
event, Tenant shall pay to Landlord on demand the expenses of such reletting
(include but not limited to all real estate commissions and all expenses
involved in readying the Premises for occupancy by the next tenant), and
any deficiency which may arise by reason of such reletting for the remainder
of the term of this Lease;
C. Declare this Lease and Tenant's right of occupancy terminated, in
which case Tenant shall peaceably surrender the Premises to Landlord;
D. Take action, on Tenant's behalf and at Tenant's expense, to perform
any obligation owing by Tenant under this Lease which Tenant has failed to
perform;
E. Landlord's rights and remedies shall be not mutually exclusive, and
Landlord may pursue one or more of its remedies simultaneously, in series,
and/or otherwise.
Landlord also shall have the right to pursue its default remedies if any of
the following occurs: (1) Tenant abandons or vacates the Premises for more
than ten (10) days; or (2) a receiver is appointed over Tenant's assets,
Tenant makes an assignment for the benefit of creditors, or Tenant takes or
suffers any action under any Bankruptcy Act.
Under no circumstances shall Landlord be deemed to have terminated this
Lease unless Landlord shall have given Tenant express written notice to that
effect.
<PAGE> 5
14.2 Landlord's Default. If Landlord fails to perform any of its
------------------
obligations under this Lease, Tenant (after first giving thirty (30) days
notice and opportunity to cure to (a) Landlord; and (b) if applicable,
Landlord's mortgagee(s) of whom Tenant has been given written notice) may
cure on Landlord's behalf and at Landlord's expense, and then offset the
reasonable costs of such cure against Tenant's next rent installment(s).
If Landlord's failure to perform involves an emergency repair, Tenant may
take action after first giving Landlord 24 hours notice and opportunity to
respond. Notwithstanding the right given above to Landlord's mortgagee(s)
to receive notice and opportunity to cure, such mortgagee(s) shall have
the option but not the obligation of curing on Landlord's behalf.
15.1 Surrender of Premises; Holding Over. If Tenant remains in
-----------------------------------
possession of the Premises after the expiration of this Lease without
Landlord's express written consent, Tenant shall indemnify and hold harmless
Landlord from and against all claims, damages, losses, liabilities, costs and
expenses (including but not limited to court costs, litigation expenses, and
attorneys' fees) (collectively, "Losses") arising out of or pertaining to the
delay by Tenant in so surrendering the Premises; including, any Losses
pertaining to proposed successor tenants whose lease negotiation, lease
execution, and/or occupancy is delayed, interfered with or prevented by
Tenant's holdover. Tenant's holding over shall be deemed to have created a
tenancy at will (terminable by Landlord at any time), and so long as Tenant
continues to occupy the Premises, Tenant shall be liable for the performance
of all of its obligations under this Lease, as well as a per diem rent based
on two (2) times the rate of the Minimum Rent and additional rent that had
been payable during the last month of the lease term.
16.1 Subordination. Tenant accepts this Lease subject and subordinate
-------------
to any present or future mortgage, deed of trust or other lien at the
Premises, Building or Complex and to any renewals, refinancing, extensions,
modifications and replacements thereof. This subordination shall be self-
operative and no further instrument of subordination shall be required. In
confirmation of this subordination, Tenant shall execute and promptly deliver
any certificate that Landlord or any mortgagee may require.
16.2 Attornment. In the event of a sale, transfer or assignment of
----------
Landlord's interest in the Complex or any part thereof, including the
Premises, or in the event any proceedings are brought for the foreclosure
of or for the exercise of any power of sale under any mortgage made by
Landlord covering the Complex or any part thereof, including the Premises,
Tenant shall attorn to and to recognize such transferee, purchaser, or
mortgagee as Landlord under this Lease, provided, however, that such
transferee, purchaser, or mortgagee recognizes Tenant's rights under this
Lease.
17.1 Tenant's Estoppel Letter. Within seven (7) days of Landlord's
------------------------
request, Tenant shall provide a true copy of Tenant's lease (and any modifi-
cations thereto), and a statement ("Tenant's Estoppel Letter") certifying:
(a) the lease term commencement and expiration dates; (b) that the Lease is
in full force and effect according to its original terms (or as modified,
stating the date and nature of such modification); (c) the date to which
the rental and other sums payable under this Lease have been paid; (d) the
fact that there are no current defaults under this Lease by either Landlord
or Tenant except as specified in Tenant's statement; (e) the amount of any
prepaid rents, charges, or security deposits claimed by Tenant; (f) whether
or not any "free rent" or other rent concessions have been granted to
Tenant; and (g) such other matters requested by Landlord. Landlord and
Tenant intend that any statement delivered pursuant to this Paragraph may
be relied upon by any mortgagee, beneficiary, purchaser or prospective
purchaser of the Complex or any interest therein. Tenant's failure to
deliver such statement within such time shall be conclusive upon Tenant,
(a) that this Lease is in full force and effect, without modification except
as may be represented by Landlord; (b) that there are no uncured defaults in
Landlord's performance; (c) that not more than one (1) month's rental has
been paid in advance; and (d) no free rent or other rent concessions have
been granted to Tenant. Nothing in this Section 17.1 shall require Tenant
to sign any statement or certificate which is not accurate.
18.1 Attorney's Fees. In the event of legal action between Landlord
---------------
and Tenant, the prevailing party in such action shall be entitled to be
reimbursed by the other party in the amount of all reasonable attorney's
fees, litigation related expenses, and other costs incurred by the
prevailing party.
18.2 Limitations on Landlord's Obligations. If Landlord sells or
-------------------------------------
transfers the Premises, Building and/or Complex, Landlord shall be released
from all liability and obligations under this Lease from and after the date
of such sale or transfer. Thereafter, Tenant shall look solely to the
successor owner. Additionally, all claims of Tenant, if any, against any
Landlord shall be limited to such Landlord's interest in the Complex.
18.3 Notices. Any notice under this Lease shall be in writing and shall
-------
be deemed given if delivered personally, by Federal Express or other receipted
courier service, or mailed by registered or certified mail, addressed to
Landlord or Tenant, at the addresses indicated above, or to such other address
as either party shall give to the other from time to time on five (5) days
notice.
18.4 Entire Agreement. This Lease, including the exhibits, riders
----------------
and/or addenda, if any are attached , sets forth the entire agreement between
the parties. All prior conversation or writings between the parties or their
representatives are merged herein and are extinguished. This Lease shall not
be modified except by a signed written instrument.
18.5 Provisions Binding. Except as otherwise expressly provided in
------------------
this Lease, all covenants, conditions and provisions of this Lease shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective heirs, legal representatives, successors and (to the extent
permitted) assigns.
<PAGE> 6
18.6 Governing Law; Trial by Jury. The laws of the State of New
----------------------------
Jersey shall govern this Lease. If either party institutes legal action
pertaining to this Lease, the venue of the suit shall be in Cumberland
County, New Jersey. The parties also expressly waive any right which
they otherwise may have to have any disputes between them resolved by
means of trial by jury.
18.7 Brokerage Commissions. Except for the involvement of ERA Pearce-
---------------------
Jannarone ("EP-J"), who is Tenant's broker, and/or N/A , who is Landlord's
broker, no brokers, real estate agents, or other similar persons were involved
in this transaction. The sole compensation to be paid to any brokers by
Landlord shall be in accordance with separate written commission agreement(s)
entered into between Landlord and such broker(s). Landlord and EP-J have
entered such a written agreement, and Tenant has no liability to EP-J under
that agreement. Accordingly, each of Tenant and Landlord shall indemnify,
defend, and hold the other harmless of and from all claims, liabilities,
obligations, costs and expenses (including but not limited to court costs,
attorneys fees, or litigation expenses) pertaining to broker's commissions or
other similar fee claims arising out of or relating to the actions or
omissions of the indemnifying party and not otherwise described herein.
18.8 Authorship. Neither party to this Lease shall be benefited or
----------
burdened by any rule of document interpretation that otherwise would interpret
a document against the interests of the author.
18.9 Interest on Past Due Sums. In addition to all other rights or
-------------------------
remedies available to Landlord under this Lease, Landlord, at Landlord's sole
option, may require Tenant to pay interest on past due obligations at a rate
equal to the lesser of (i) fifteen percent (15%) per annum; or (ii) the
maximum rate of interest permitted to be charged to Tenant under state or
federal law (whichever allows the higher rate of interest).
18.10 [Intentionally Deleted]
18.11 Removal of Personal Property. At the expiration or termination
----------------------------
of the Lease, at the request of Landlord, Tenant shall remove all of its
fixtures, furniture, equipment and other personal property from the Premises.
If Tenant does not do so within ten (10) days of Landlord's request, Landlord
may dispose of such property in any manner Landlord chooses, without any
liability or obligation to Tenant. Among other things, Landlord may treat such
property as abandoned by Tenant. Any costs or expenses incurred by Landlord in
dealing with or disposing of such property shall be reimbursed to Landlord by
Tenant upon demand.
18.12 Mechanic's Liens. Tenant will not cause or permit any mechanic's
----------------
or materialmen's liens to be filed against the Premises, Building or Complex.
If that occurs, Tenant shall cause the same to be removed immediately upon
Landlord's demand.
18.13 Waiver by Landlord. No failure by Landlord to take action upon
------------------
learning of Tenant's default under this Lease shall constitute a waiver by
Landlord. Landlord's waiver can only be granted in writing. Written waiver
by Landlord of a particular default shall apply to that particular
occurrence only, and not to any future such default or occurrence. Acceptance
by Landlord of any partial payment from Tenant will not waive Landlord's
right to pursue Tenant for any remaining balance. No endorsement or statement
on any check or letter which acknowledges a check or payment as rent shall be
deemed an accord and satisfaction.
18.14 Condominium Rider. This Lease is subject to the Condominium
Rider attached as Exhibit C. Notwithstanding anything in Exhibit C to the
contrary, Exhibit C shall not be binding upon Tenant to the extent that it
modifies or otherwise limits the permitted Use of the Premises as described
in Paragraph 5.1 above, the terms of this Lease, and/or the Minimum Rent. It
is further understood that if the Premises are made part of a condominium
regime, Tenant shall not be responsible for any operating expenses in excess
of those that otherwise would have been chargeable to Tenant under this Lease
had the Complex not been made part of a condominium regime.
18.15 Window Coverings. Window coverings shall be provided at the
----------------
Tenant's expense. All windows at the first floor level shall be covered
with horizontal members and shall be white to the exterior.
18.16 Renewal Option.
--------------
A. Tenant has two (2) renewal options for renewal terms of five (5)
years each. To exercise its renewal options, Tenant must give Landlord
written notice one hundred eighty (180) days before the expiration of the
then current lease term that Tenant intends to renew.
B. The renewal terms(s) shall be on the same terms and conditions as
are described in the Lease, except as to Minimum Rent and Minimum Rental
Adjustment. During the first renewal term, the Minimum Rent shall be the
greater of (1) $13.25 per square foot or (2) the Minimum Rent applicable in
year 5, multiplied by a fraction whose numerator is the CPI applicable in
month 60 of the initial lease term, and whose denominator is the CPI
applicable in Month 1 of the initial lease term. During the second renewal
term, the Minimum Rent shall be the greater of (1) $15.15 per square foot or
(2) the Minimum Rent applicable in year 10, multiplied by a fraction whose
numerator is the CPI applicable in month 120 and whose dominator is the CPI
applicable in month 61. If Tenant notifies Landlord that Tenant intends to
exercise a renewal option, Landlord shall provide Tenant, within thirty (30)
days thereafter, with the Minimum Rental Adjustment schedule to be appli-
cable during that renewal period. Tenant then shall have seven (7) days
within which to notify Landlord in writing that (i) Tenant accepts that
Minimum Rental Adjustment schedule; or (ii) Tenant withdraws and terminates
its notice of intent to renew.
<PAGE> 7
C. The term CPI means the Consumer Price Index--All Urban Consumers
(Philadelphia Region), or the successor of that index. If the CPI is no
longer available as a rent adjustment reference, the parties shall use such
other index or reference point as may then be in common use in determining
suburban office rent adjustments as reasonably may be selected by Landlord.
D. Landlord shall have no obligation to honor Tenant's exercise of
renewal option if:
(1) Tenant is in default;
(2) Tenant shall have been in default (whether or not that default
was waived by Landlord or was cured by Tenant after notice of
default) more that three (3) times during the prior lease term; or
(3) Landlord determines that Tenant (or the use of the Premises by
Tenant) is creating problems which make the Tenant no longer
desirable to Landlord as a Tenant at the Complex.
18.17 Guarantee. Tenant and the Guarantor identified in the Guarantee
---------
attached as Exhibit D shall be jointly and severally liable for all of the
obligations of Tenant under this lease.
18.18 Cooperation with Landlord's Lender(s). Landlord to this date has
-------------------------------------
financed the project from Landlord's own resources, but Landlord contemplates
obtaining mortgage financing in the future. In this connection, Tenant agrees
to cooperate with Landlord's mortgage lender(s) to the extent that any
additional language is requested by them to be added to the Lease (provided,
however, that such language shall not limit Tenant's permitted Use of the
Premises, change the term of the lease, change the amount of rent payments
and other charges to be made by Tenant under the lease, or otherwise create
any material additional limitations or burdens upon Tenant. Tenant agrees to
execute a Subordination, Attornment, and Non-Disturbance Agreement and/or
such other instruments as are customary and reasonable in such circumstances.
LANDLORD:
MAINTREE OFFICE CENTER, L.L.C.
/s/ David Lerman
By:--------------------------------
Name: DAVID LERMAN
Title: Lerman Partners, L.P., Member
TENANT:
DCA OF VINELAND, L.L.C
/s/ Bart Pelstring 5/10/99
By:--------------------------------
Name: BART PELSTRING
Title: President
Index to Exhibits
- -----------------
Exhibit A - Premises Location
Exhibit B - Landlord's and Tenant's Work
Exhibit C - Condominium Rider
Exhibit D - Guarantee
MEDICAL DIRECTOR AGREEMENT
THIS MEDICAL DIRECTOR AGREEMENT ("Agreement") made as of April 30, 1999
Between Vineland Dialysis Professionals, LLC
a ------------- professional limited liability company with offices
at 510 Jackson Avenue
Northfield, N.J. 08225
hereinafter referred to as the "P.A."
And DCA of Vineland, LLC
a New Jersey limited liability company with offices at
c/o Dialysis Corporation of America
27 Miller Street
Lemoyne, PA 17043
hereinafter referred to as the "Company."
The P.A. and the Company may hereafter be referred to individually as a "Party"
and collectively as the "Parties."
WITNESSETH:
WHEREAS, the Company intends to develop, own and operate a renal dialysis
facility to be located within the vicinity of Vineland, State of New Jersey,
with such specific location as the Parties may select ("Facility");
WHEREAS, the P.A. is a limited liability company wholly owned by Dr. David
Blecker.
WHEREAS, the P.A. retains duly licensed physician(s) under the laws of the State
of New Jersey, specializing in the treatment of kidney disease and experienced
in the medical administration of a renal dialysis facility;
WHEREAS, the Company through the operation of the Facility seeks to operate a
free standing dialysis center to provide all levels of outpatient dialysis care,
including but not limited to chronic maintenance dialysis, home treatment
through hemodialysis or peritoneal dialysis, either continuous and insulatory
peritoneal dialysis or continuous cycling peritoneal dialysis, chronic dialysis,
and inpatient dialysis services and related services to hospitals, nursing
homes, healthcare facilities, and similar institutions, as well as ancillary
services to End Stage Renal Disease ("ESRD") patients ("Dialysis Treatments");
to provide to persons having ESRD and other forms of renal failure the care they
need; to encourage proper distribution and effective utilization of ESRD
treatment while maintaining or improving the quality of care; and to promote the
efficient delivery of ESRD care;
<PAGE>
WHEREAS, the Company desires to contract with the P.A. to provide certain
services as defined herein and the P.A. desires to render such services to the
Company; and
WHEREAS, the Parties desire to enter into this Agreement in order to provide a
full statement of their respective responsibilities as they exist in connection
with the provision of services during the term of this Agreement;
NOW THEREFORE, in consideration of the mutual covenants and promises contained
in and intending to be legally bound by this Agreement the Parties agree as
follows:
1. CONTRACT FOR SERVICES
The Company hereby contracts with the P.A. to assist in the Facility's
Dialysis Treatments and provide services at the Facility as required by 42 CFR
405.2100 et seq., or any successor regulations, including those services as
provided in Section 3 of this Agreement. P.A. represents, warrants and agrees
that there will be available to the Facility during its operations, the services
of a qualified, licensed Medical Director as per Section 2. P.A., subject to the
terms of this Agreement and, in particular, Section 8 hereof, shall be
responsible for planning, organizing, conducting and directing the professional
ESRD services at the Facility. All services to be provided by the P.A. in this
Agreement are hereinafter sometimes collectively referred to as "Services." The
P.A. hereby agrees to provide such Services under and subject to the terms and
conditions as provided in this Agreement.
2. MEDICAL STAFF AND COVERAGE
2.1 PHYSICIANS. The Services of the P.A. shall be coordinated by Dr.
David Blecker, who is hereby appointed by the Company to serve as the Medical
Director of the Facility throughout the term of this Agreement, unless the P.A.
shall designate some other qualified physician to assume the duties of Medical
Director. Any candidate recommended or designated by the P.A. to serve as
Medical Director will be subject to the approval of Company which approval will
not be unreasonably withheld. The Medical Director may hereinafter also be
referred to as the "Physician."
2.2 COVERAGE. The P.A. or the Medical Director need not devote
full-time to the Dialysis Treatments or the provision of Services but shall
devote sufficient time as necessary to fulfill its and his or her
responsibilities as required in this Agreement. The P.A. shall provide for
Physician coverage for all hours of Facility's operation and 24 hour emergency
on-call coverage.
The Company acknowledges that P.A. and Medical Director are engaged in
the practice of medicine in the Vineland, New Jersey area, in particular, the
private practice of nephrology and/or internal medicine, and that each such
persons may continue to be so engaged during the term of this Agreement and may
perform services for and on behalf of their respective patients in addition to
but non-competitive with those Dialysis Treatments of and those Services which
are required of him to be performed for the Facility as provided for in this
Agreement, provided, the same does not unreasonably interfere with the
performance of their respective obligations hereunder. Services deemed
non-competitive include and are limited to treatment of patients other than for
Dialysis Treatments and other than acute dialysis treatments which the Facility
may perform.
2
<PAGE>
2.3 MEDICAL DIRECTOR.
2.3.1 LICENSE AND CERTIFICATION. Each Medical Director (i)
represents to and shall be licensed to practice medicine and to dispense
narcotics and other pharmaceuticals in accordance with the laws of the State of
New Jersey; (ii) represents to and shall be Board certified in internal medicine
or in nephrology; (iii) represents to and shall have at least 12 months of
experience or training in the care of patients at ESRD facilities; (iv)
represents to and shall have experience in medical administration of a renal
dialysis facility; and (v) represents that he or she is not subject to any
pending or threatened litigation or professional discipline relating to his or
her medical practice or licensure for the prescribing and/or dispensing of
narcotics and pharmaceuticals, for the last five years has not been subject to
any such litigation or professional discipline except as disclosed in EXHIBIT
2.3.1, nor has any knowledge of facts or circumstances that could give use to
any such litigation or professional discipline other than as disclosed in
EXHIBIT 2.3.1.
2.3.2 MEDICAL STAFF APPOINTMENT. Each Medical Director shall
apply for, be awarded and maintain appointment in good standing on the medical
staff of the Facility in accordance with Facility's policies as well as
applicable Facility and medical staff bylaws, rules and regulations.
2.3.3 PROGRAM ELIGIBILITY. Each Medical Director shall be and
remain eligible to participate in the Medicare program and the state medical
assistance program.
2.3.4 AGREEMENT TO BE BOUND. The P.A. and the Medical Director
represent and warrant that they shall use their best efforts and skills in
fulfilling their responsibilities and duties as provided in this Agreement. The
P.A. shall not utilize any Physician to provide Services under this Agreement
unless such Physician has been appointed Medical Director as provided in Section
2.1, and has executed a document, legally obligating such Physician individually
to abide by the terms and conditions of this Agreement in form as provided in
EXHIBIT 2.3.4 or as otherwise reasonably requested by Company.
2.3.5 NO CONFLICT. The P.A. and each Medical Director
represent and warrant that it, he and/or she has no affiliation, contract,
agreement or other arrangement with any other person or entity that would
prohibit the P.A. or Physician from performing under this Agreement or otherwise
conflict with the terms and provisions of this Agreement. The P.A. and each
Medical Director hereby indemnify and hold the Company, the Facility and their
respective shareholders, officers, directors, successors and assigns
(collectively "Representatives") harmless from any and all claims, suits,
obligations restrictions, liabilities and other causes of action (collectively
"Claims") which may arise from a breach of this representation as set forth in
this Section 2.3.5, which indemnification includes but is not limited to any and
all costs and fees incurred by the Company, Facility and/or Representatives in
defending any such Claims as indemnified herein, including reasonably counsel
fees.
3. SERVICES
The Services of the P.A. and Medical Director shall include:
3.1 Being in charge of and responsible for all medical aspects of the
Facility's operation to provide high quality medical treatment, providing the
proper coordination and functioning of all medical services, and being
responsible for adequate supervision of dialysis
3
<PAGE>
treatments in accordance with federal regulation and/or any and all other
applicable state and/or local regulations now in existence or hereafter passed
applicable to the operation of the Facility;
3.2 Consulting with and advising the executive management of the
Facility on matters including, but not limited to, the hiring and firing of
medical, para-medical and technical personnel employed by the Facility and the
type of equipment and supplies to be used in the Facility for patient care;
3.3 Assuring adequate monitoring of the patient and the dialysis
process (minimum in-center rounds once per week), including for self-dialysis
patients, assuring periodic assessment of patient performance of dialysis tasks;
3.4 Assuring the development and availability of a patient care policy
and procedures manual and its implementation; at a minimum, the manual shall
describe the types of dialysis used in the Facility and the procedures followed
in performance of such dialysis; hepatitis prevention and procedures for
handling an individual with hepatitis; and a disaster preparedness plan (e.g.,
patient emergency, fire, flood);
3.5 Assuring that patient teaching materials are available for the use
of all trainees during training and at times other than during the dialysis
procedure when self-dialysis training or home dialysis training is offered;
3.6 Supervising in the development and implementation of a system of
patient care evaluation (quality assurance) including peer review and audit;
3.7 Aiding in the recruitment of qualified doctors and nurses to be
associated with and/or employed by and as required by the executive management
of the Facility;
3.8 Supervising the nursing, technical and medical staff;
3.9 Establishing and supervising a training program in dialysis
techniques for medical, nursing and technical employees of the Facility;
3.10 Serving as the chairman of the Medical Review Board of the
Facility;
3.11 Consulting with other medical and governmental agencies and
facilities needed to further the interests, operating and progress of the
Facility;
3.12 Supervising the maintenance of all appropriate medical records
relating to medical services rendered at the Facility;
3.13 Developing and supervising a preventative maintenance training
program for staff personnel pertaining to the maintenance of all equipment;
3.14 Using its, his and her best efforts to be available and present at
the Facility during times of inspection by regulatory agencies;
3.15 Acting as spokesperson and coordinator for the Facility during any
Certificate of Need process in connection with the establishment and approval
processes for the Facility and any future expansion thereof and assisting the
Facility in obtaining all necessary approvals and consents for additional
dialysis stations;
4
<PAGE>
3.16 Establishing review and monitoring of water quality for dialysis;
3.17 Instituting and supervising a dialyzer re-use program in
compliance with recognized medical standards;
3.18 Evaluating laboratory procedures and services;
3.19 Establishing, maintaining and monitoring infection control
policies;
3.20 Assuring and warranting that the Medical Director, any Assistant
Medical Director(s) and Physician(s) have the proper credentials and maintain
the necessary licenses and/or approvals to participate in all federal, state and
local kidney disease programs governing the operation and/or reimbursement for
the Facility in which the Facility participates; and
3.21 Helping to establish hospital inpatient dialysis agreements and
other affiliation agreements with acute-care hospitals, nursing homes and
similar healthcare facilities and transplant centers; assuring that the Facility
meets all licensing and other requirements for any hospital or other entity in
which the Facility has an affiliated inpatient agreement, and promote the goals
of the Company and the Facility in maintaining such agreements.
4. COMPENSATION
4.1 AMOUNT OF COMPENSATION. For the P.A.'s services as provided in this
Agreement, which are and include the services of the Medical Director, the
Company will pay the P.A. and the P.A. accepts as full and sufficient
compensation the amounts set forth in EXHIBIT 4.1 ("Compensation"), incorporated
herein by reference.
4.2 PAYMENT. The Company shall pay Compensation under this Agreement to
P.A. on the last day of each month in each Agreement Year (incremental periods
of 12 months starting from the Commencement Date), allowing for ten business
days check processing time, an amount equal to one twelfth (1/12th) of the
Compensation required to be paid to P.A. pursuant to this Article 4 in such
Agreement Year, by check drawn to the order of P.A. and mailed to the address
specified for P.A. set forth on EXHIBIT 12.8 attached hereto, or such other
address as designated in writing.
4.3 PHYSICIAN'S FEES. It is agreed and understood that P.A., the
Medical Director and all other Physicians involved in patient care at the
Facility shall do their own billing of fees for Physician's services to the
appropriate party, which services and fees shall not be billed to or be the
responsibility of the Company or the Facility.
4.4 ECONOMICAL SERVICES. The P.A. and Medical Director represent and
warrant that the Services shall be performed in an economical and professional
manner, and that each of them shall use their best efforts to maintain the costs
of Dialysis Treatments at reasonable and efficient levels subject to the
exercise of good medical judgment. This representation and warranty is a
material inducement to the Company in entering into this Agreement.
5
<PAGE>
5. INSURANCE
5.1 REQUIRED COVERAGE. The P.A. shall maintain for itself and shall
require any Physician who provides Services pursuant to this Agreement to
maintain basic limits professional malpractice liability insurance during the
term of this Agreement and thereafter covering all Services provided pursuant to
this Agreement in amounts not less than $1,000,000 per occurrence and $3,000,000
per annual aggregate. The P.A.'s and Medical Director's obligations under this
Section 5.1 shall survive for three (3) years following termination of this
Agreement. Upon failure of P.A. or any Physician to obtain such professional
malpractice liability insurance, in addition to being a breach of the Agreement,
the Company shall have the option, not the obligation, to obtain the same for
the P.A. and any such Physician(s), to pay the premiums and charge the same
together with any administrative and service fees and charges to the P.A. and/or
Physician and P.A. and/or Physician shall immediately pay such sum to the
Company.
5.2 CERTIFICATE OF INSURANCE. The P.A. and/or Physician shall provide
to the Company prior to commencing or continuing Services hereunder certificates
of insurance evidencing the professional malpractice liability insurance
coverage required in Section 5.1 as well as a certificate of insurance
evidencing the P.A.'s workmen's compensation coverage and to notify the Company
immediately of any modifications or cancellation or termination of such
insurance coverage.
5.3 COMPANY INSURANCE. The Company shall provide and maintain liability
insurance for itself and its employees who perform services at or in connection
with the Facility.
5.4 INDEMNIFICATION. Each Party (including any Physician providing
Services) shall hold harmless and indemnify the other and their Representatives,
and any person or entity that directly or indirectly, through one or more
intermediaries, controls or is controlled by, or is under common control with,
it, including their officers, directors and shareholders, hereinafter
"Affiliates," from and against any and all Claims, expenses and attorney's fees
resulting from or attributable to any and all acts and omissions of such
Indemnifying Party.
6. RULES AND REGULATIONS
6.1 LAWS, RULES AND REGULATIONS. The P.A. and each Physician shall at
all times render Services in compliance with all applicable federal, state and
local laws, rules and regulations and in compliance in all material respects
with the Facility's bylaws, rules and regulations.
6.2 REQUIREMENTS AND STANDARDS. The P.A. and all Physicians shall
maintain such standards and meet such requirements as will, at all times,
continue certification of the Facility as an ESRD dialysis facility under the
federal Medicare program and continuance of any license or operating certificate
of the Facility.
7. RESTRICTIVE COVENANT
7.1 GENERAL AND DEFINITIONS
7.1.1 PURPOSE. The Parties acknowledge that the Dialysis
Treatments and Services are of a special and unique character and that the P.A.
and each Physician has and will
6
<PAGE>
receive substantial economic benefit and valuable business information as a
result of association with the Company and the Facility; that the Company will
incur expense in the development and promotion of the Facility; and that if the
P.A. or a Physician is permitted to engage in Restricted Activity during the
Restricted Period (as hereinafter defined) the Company will suffer substantial
economic injury.
7.1.2 RESTRICTED ACTIVITY. As used in this Agreement
"Restricted Activity" shall mean participation or involvement, direct or
indirect, either as principal, agent, proprietor, shareholder, P.A., creditor,
subcontractor, administrator, physician, medical director, officer, employee,
consultant or otherwise, in any entity, trade or business (other than for the
Company) providing Dialysis Treatments and/or Services within the "Restricted
Area" as defined in Section 7.1.4; and "Restricted Activity" also includes the
restriction and prohibition of advising, assisting, consulting with, leasing or
selling real property to, provide financing for or aid in the establishment or
operation of any competing business or Restricted Activity in the Restricted
Area during the Restricted Period; provided however such Restricted Activity
shall not include: (i) a Physician's direct patient care services to ESRD, other
dialysis patients or any other patients as otherwise provided for in Section 2.2
of this Agreement; (ii) the ownership of less than five percent (5%) of the
issued and outstanding stock of a public company; or (iii) those activities
listed on EXHIBIT 7.1.2.
7.1.3 SERVICES. The terms "Dialysis Treatments" and "Services"
shall be as defined in this Agreement, as well as generally including the
providing of dialysis equipment and supplies; provided the terms "Dialysis
Treatments" and "Services" do not include dialysis involving a medical problem
which the Facility is unable to handle which requires hospitalization, but
inclusive of those acute and chronic dialysis patients requiring hospitalization
and other patients of an institution or hospital who may require dialysis
treatment if the Facility or the Company has an affiliation agreement to provide
such inpatient dialysis services with such local institution or hospital,
including but not limited to staff assisted hemodialysis, continuous ambulatory
peritoneal dialysis and home training staff assisted dialysis treatments,
exclusive of those facilities listed on EXHIBIT 7.1.3.
7.1.4 RESTRICTED AREA. As used in this Agreement, "Restricted
Area" shall mean any location within a radius of 20 miles of the Facility.
7.1.5 RESTRICTED PERIOD. As used in this Agreement "Restricted
Period" shall mean the Term of this Agreement and one (1) year thereafter,
provided however, in the event of any violation of this Article 7 the Restricted
Period shall be extended by a period of time equal to that period beginning when
the violation commenced and ending when the violation terminated; provided
further that if this Agreement is terminated pursuant to Section 11.3 and the
cause was not due to the P.A. or Medical Director, then the Restrictive Period
shall mean the Term of this Agreement and nothing more.
7.2 COMPETITION. During the Restricted Period the P.A. and/or any
Physician shall not engage in any Restricted Activity.
7.3 EMPLOYEES AND CONTRACTORS. During the Restricted Period, P.A. or
any Physician shall not induce, solicit or attempt to influence, any employee,
contractor, reimbursement sources, providers, suppliers, insurors and other
third-party payors of the Company or the Facility to terminate a relationship
with the Company or the Facility or to enter into any employment or other
business relationship or affiliation or Restricted Activity with any other
person, firm, or corporation, including the P.A. or any Physician.
7
<PAGE>
7.4 SCOPE OF COVENANTS. It is expressly understood and agreed that the
scope of the various covenants in this Article 7 are reasonable both in time and
area and are fair and necessary to protect the legitimate interests of Company
and the Facility against the material adverse effects which would result from
the violation of any of these covenants.
7.5 DIVISIBILITY OF COVENANTS. The covenants of this Article 7 shall be
regarded as divisible and shall be given the greatest operative effect possible.
If any part of them is declared invalid or unenforceable in any respect, the
validity and enforceability of the remainder shall not be affected. If the
Restricted Activity, Restricted Area and/or Restricted Period, as provided
herein, should be adjudged unreasonable in any judicial proceeding, then the
Restricted Activity, Restricted Area and/or Restricted Period shall be reduced
as is deemed necessary to allow this Article 7 to be enforced.
7.6 REMEDIES. It is understood that in the event of any violation of
the covenants of this Article 7, the Company and/or the Facility shall suffer
irreparable injury not compensable by monetary damages and the Company, the
Facility and their Affiliates shall be entitled to seek preliminary and
permanent injunctive relief from any court of competent jurisdiction in addition
to any other remedies available under this Agreement or at law or in equity. The
Company, the Facility and/or the Affiliates shall be entitled to reasonable
attorney's fees and other costs it or they may incur in connection with
protecting their rights in the event of a breach as contemplated and provided
herein.
7.7 BANKRUPTCY. The covenants and restrictions contained in this
Section 7 shall not be applicable upon a final declaration of bankruptcy of the
Company or the abandonment of the Facility by the Company which means the
intentional giving up of the Facility by the Company and not the termination of
operations or this Agreement as otherwise provided herein.
7.8 INDEPENDENT COVENANT. The restrictive covenants, particularly the
covenant not to compete on the part of the P.A. and Physicians, shall be
construed as an agreement independent of any other provision of this Agreement,
and the existence of any claims or cause of action of the P.A. or Physician
against the Company or the Facility, whether based upon this Agreement or
otherwise, shall not constitute a defense to or a repeal or cancellation of the
enforcement by the Company, the Facility or the Affiliates of this covenant not
to compete.
8. CONFIDENTIALITY
8.1 CONFIDENTIAL INFORMATION. In the operation and development of
existing renal dialysis facilities and implementing Dialysis Treatments and
Services by the Company and its parent, Dialysis Corporation of America ("DCA")
and the planning and development of the Company's and DCA's proposed businesses,
the Company and DCA generate information and data which is and will be
proprietary and confidential ("Confidential Information"), the disclosure of
which would be extremely detrimental to the business of the Company and DCA and
of great assistance to its competitors. The Confidential Information includes,
but is not limited to:
(a) DEVELOPMENT. Data, plans and projections regarding the
location, development and expansion of existing and proposed facilities;
(b) MARKETING. Market surveys, studies and analyses;
8
<PAGE>
(c) SERVICES. Information concerning the identities, locations
and qualifications of professionals and other persons presently, or
prospectively to be, retained or employed by the Company or DCA;
(d) SUPPLIERS, ETC. Information concerning the identities,
locations, prices, costs and other terms of dealings with referral and
reimbursement sources, suppliers, providers and supplier and provider
organizations and entities; administrative and accounting procedures and
policies and information about contractual and other arrangements and
affiliations with any of the foregoing;
(e) REGULATORY MATTERS. Information concerning legislative,
administrative, regulatory and zoning requirements, bodies and officials;
(f) RECORDS. Medical, patient and personnel records;
(g) DATA. Statistical, financial, cost and accounting data;
(h) PATIENTS. Existing and prospective patient lists, names
and addresses; and
(i) MANUALS. Administrative, accounting, operations and
procedures manuals.
8.2 NON-DISCLOSURE. The P.A. and Medical Director understand and agree
that due to the highly competitive nature of the healthcare industry and the
business of the Facility, the Company and DCA, disclosure of any of the
Confidential Information would be extremely damaging to any and all of them. The
P.A. and Medical Director agree that its, he and/or she will not use or divulge
such Confidential Information without the prior written consent of the Company.
The restrictions set forth in this Article 8 shall not apply to any part of the
Confidential Information which (i) is or becomes generally available to the
public or publicly known other than as a result of disclosure by the P.A. or
Medical Director; (ii) becomes available to the P.A. or Medical Director on a
nonconfidential basis from a source which is not itself breaching any
non-disclosure or similar restrictive covenant; (iii) is disclosed pursuant to
the requirement of a governmental agency or court of competent jurisdiction or
as otherwise required under applicable law; or (iv) was known or available to
the P.A. or Medical Director prior to the date of this Agreement without any
obligation of confidentiality; provided as to this subparagraph (iv) such can be
proved through written evidence.
8.3 REMEDIES. It is understood that any violation or breach of the
covenants and provisions of this Article 8 could cause the Company, the Facility
and/or DCA irreparable injury not compensable by monetary damages, and the
Company, the Facility and/or DCA and their Affiliates are entitled to such
injunctive relief and any and all other remedies as provided in Section 7.6 of
this Agreement.
9. TERM
9.1 TERM. The term of this Agreement shall commence on the Commencement
Date as provided in Section 9.2 and continue thereafter (unless sooner
terminated as provided for in this Agreement) for an initial term of ten (10)
years from such date ("Term").
9
<PAGE>
9.2 COMMENCEMENT DATE. The Term of this Agreement shall commence
("Commencement Date") on the effective date of certification of the Facility as
a Medicare-certified end-stage renal disease facility ("Certification"). If the
Certification does not occur on or before 12 months following the date of this
Agreement, then this Agreement shall be void and of no force and effect and
neither party shall have any right or obligation hereunder.
9.3 RENEWAL. Provided the P.A. and the Medical Director have fulfilled
their obligations and responsibilities under this Agreement and have not
defaulted or breached under the terms and conditions of the Agreement, then this
Agreement is automatically renewed for five additional five year renewals
provided P.A. does not give the Company less than one (1) year written
notification prior to the end of the Term or any particular renewal period, of
its intent to terminate at the expiration of the Term or such renewal period.
10. CONTRACTUAL RELATIONSHIP
10.1 INDEPENDENT CONTRACTOR. The P.A. and any Medical Director shall,
at all times, be independent contractors and not employees of the Company or the
Facility, and the P.A. and any Medical Director shall not hold itself or the
Physicians out as employees of the Company or the Facility. In furtherance
thereof, the Company and Facility and P.A. covenant and agree that one is
neither the employee, employer, principal or agent of the other, except that
each of the P.A. and Medical Director is an independent contractor to the
Company and the Facility. However, it is understood that nothing in this section
or elsewhere in this Agreement shall be deemed not to subject the P.A. and
Medical Director to the supervision of the executive management or the board of
directors of the Company and the administrator of the Facility and to their
directions and control, except such Physicians and professional employees shall
have independent control over the medical practice, unless as to the latter, the
same is determined to be improper and violative of federal, state, local rules,
codes, or regulations, or such medical practices are otherwise unethical.
P.A. and all other Physicians understand and agree that personnel
employed at the Facility are employees of the Company and are not to be
considered or viewed as employees or servants of P.A. No demands or requests
will be made or placed upon such employees for secretarial duties, patient
scheduling, etc., other than for Dialysis Treatment as to be provided by the
Facility.
10.2 OBLIGATIONS. The P.A. and each Physician shall be liable for the
payment or provision for payment of all their required withholding, social
security and other taxes or benefits. It is further understood and agreed that
there is no obligation on behalf of the Company or the Facility to provide to
any Physician benefits such as but not limited to group health insurance, dental
benefits, life insurance, etc.
10.3 WITHHOLDING. Neither the Company nor the Facility shall withhold,
on behalf of the P.A. or any Physician, any sums for income tax, unemployment
insurance, social security or any other withholding or benefit, all of which
shall be the respective obligations of the P.A. or any Physician.
10.4 CONTROL. Nothing in the Agreement is intended, and shall not be
construed, to create an employer/employee relationship, a partnership or a joint
venture relationship. The interest of the Parties is to ensure that the Dialysis
Treatments of and the Services to be performed for the Facility by the P.A. and
the Physicians are rendered and performed in a
10
<PAGE>
competent, efficient and satisfactory manner and in accordance with this
Agreement and all rules and regulations of the Facility.
10.5 GOVERNMENTAL REVIEW. In the event the Internal Revenue Service or
any other governmental agency shall, at any time, question or challenge the
independent contractor relationship between the Company and the P.A. or the
Physicians, the Company, the P.A. and the Physician, upon receipt by either of
them of notice from the Internal Revenue Service or any other governmental
agency, shall promptly notify the other Parties and afford the other Parties the
opportunity to participate in any discussion or negotiation with the Internal
Revenue Service or other governmental agency, irrespective of whom or by whom
such discussions or negotiations are initiated. The other Parties shall
participate in any such discussions or negotiations to the extent permitted by
the Internal Revenue Service or other governmental agency. The provisions of
this Section 10.5 shall apply only to issues arising from the independent
contractor relationship described herein and not to any other tax matter
involving the Parties.
11. TERMINATION
11.1 TERMINATION WITHOUT FAULT
11.1.1 DEATH. This Agreement shall terminate upon the death of
the Medical Director unless within thirty (30) days of the death of Medical
Director, P.A. has appointed a substitute Medical Director, which is the
obligation of P.A., approved by the Company, and such substitute Medical
Director agrees to be bound by this Agreement and executes EXHIBIT 2.3.4.
11.1.2 DISABILITY. If the Medical Director becomes mentally or
physically unable to perform the Services required under this Agreement for a
continuous period of thirty (30) days, or if the P.A. or Medical Director is
professionally disqualified so that it, he or she cannot adequately perform its,
his or her duties and responsibilities as Medical Director, or is absent other
than for a short illness or vacation or similar reason, and the P.A. fails to
promptly appoint a substitute Medical Director, but no later than thirty (30)
days from such occurrence, which is the obligation of P.A., approved by the
Company, which substitute Medical Director agrees to be bound by this Agreement,
such shall be deemed a breach of this Agreement, other than due to failure to
perform based on mental or physical disability due to natural causes, which will
not be deemed a breach but rather a basis for termination, and the Company may
terminate this Agreement on thirty (30) days written notice. Any professional
disqualification of the P.A. or the Medical Director or non-short term absence
of the Medical Director hereby leaving the Facility without a qualified Medical
Director acceptable to the Company, except due to disability or incompetence due
to natural causes as opposed to conditions caused by the Medical Director, such
as but not limited to drug abuse or alcoholism, and any conduct or omission to
act by the P.A. or the Medical Director, that may be deemed unethical or subject
the P.A. or the Medical Director to discipline or to professional
disqualification by standards published from time to time by the Judicial
Council of the American Medical Association, whether or not disciplinary action
is taken, is a basis for the Company in its sole discretion to terminate the
Agreement and shall be deemed a breach of this Agreement.
11.2 RIGHT TO TERMINATE UPON DEFAULT. Except as otherwise provided in
Section 11.1, a Party shall have the right as provided in this Section 11.2, to
terminate this Agreement at any time upon the occurrence of any of the following
events:
11
<PAGE>
11.2.1 In the event the P.A. or any of its appointed
Physicians violates Sections 2.3.1, 2.3.3, 2.3.5, 7.2 or Article 8, the Company
may terminate this Agreement immediately; and
11.2.2 In the event a Party materially violates any other term
or condition of this Agreement which violation is not cured within thirty (30)
days after written notice to the breaching Party of such violation or if the
violation cannot reasonable be cured within such thirty (30) days, the breaching
party has not commenced within such thirty (30) days and thereafter diligently
pursued action reasonably necessary to cure such violation, the other Party may
terminate this Agreement.
11.3 LOSS OF LICENSE; FORCE MAJEURE. Either Party may terminate this
Agreement if:
11.3.1 The license for the Facility or its certification to
participate in the ESRD program is lost or suspended for ninety (90) days or
longer not due to nor the fault of that Party seeking to terminate, after
exhaustion of all hearings and appeal rights; or
11.3.2 The Facility is not usable or reasonably relocatable
within one hundred twenty (120) days due to fire, natural disaster, change of
laws or Force Majeure or other cause beyond the Parties' control, and not due to
nor the fault of that Party seeking to terminate.
11.4 CUMULATIVE REMEDIES. The specific remedies provided in this
Agreement shall be in addition to and not in substitution for the rights and
remedies which would otherwise be vested in the Parties under the Agreement, at
law or in equity, all of which rights and remedies are specifically reserved by
the Parties. Failure of a Party to exercise any remedy shall not constitute a
waiver of the Party's rights for that default nor of any further or future
default.
12. GENERAL PROVISIONS
12.1 ASSIGNMENT. The P.A. shall not assign, sell or transfer this
Agreement, its obligations hereunder or any interest herein. This Agreement may
be assigned in whole or in part by the Company.
12.2 GOVERNING LAW. This Agreement shall be deemed to have been made
and shall be construed and interpreted in accordance with the laws of the State
of New Jersey, conflicts of law provisions notwithstanding.
12.3 SEVERABILITY. If any term or provision of this Agreement or in the
application thereof to any person or circumstances shall to any extent be
invalid or unenforceable, the remainder of this Agreement on the application of
such term or provision to persons or circumstances other than those to which it
is held invalid or unenforceable shall not be affected thereby, and each term
and provision of the Agreement shall be valid and enforceable to the fullest
extent permitted by law.
12.4 INTEGRATED AGREEMENT. This Agreement constitutes the entire
understanding and agreement between the Parties concerning the subject matter
hereof. This Agreement supersedes all prior written or oral agreements or
understanding existing between the Parties concerning the subject matter hereof.
12.5 CAPTIONS. Captions contained in this Agreement are inserted only
as a matter of convenience and in no way define, limit, or extend the scope or
intent of this Agreement or any provision hereof.
12
<PAGE>
12.6 GENDER. Any noun or pronoun used in this Agreement shall be
construed in masculine, feminine or neuter as its sense and use may require.
12.7 WAIVERS AND AMENDMENTS. No waiver of any term, provision, or
condition of this Agreement, whether by conduct or otherwise in any one or more
instances, shall be deemed to be or construed as a further and continuing waiver
of any such term, provision or condition of this Agreement. No amendment to any
provision of this Agreement shall be effective unless in writing and signed by
each Party.
12.8 NOTICES. All notices pursuant to this Agreement shall be in
writing and shall be given by hand delivery or by depositing said notices in the
United States registered or certified mails, return receipt requested, addressed
to a party at the addresses as provided in attached EXHIBIT 12.8, or to such
other address as may hereafter be specified in writing by one Party notifying
all other Parties in the manner set forth herein. All notices given in the
manner prescribed in this Section shall be deemed properly served upon receipt.
12.9 ACCESS TO BOOKS AND RECORDS. This Section is included herein
because of the possible application of Section 1861 (v) (1) (I) of the Social
Security Act to this Agreement; if that section should not be found applicable
to this Agreement under the terms of such section then this Section shall be
deemed not to be a part of this Agreement and shall be null and void.
12.9.1 P.A. Until the expiration of four (4) years after the
furnishing of Services pursuant to this Agreement, the P.A. shall make available
upon written request of the Secretary of Health and Human Services or the United
States Controller General or any of their duly authorized representatives, this
Agreement, and any books, documents and records of the P.A. that are necessary
to certify the nature and extent of costs incurred by the Company under this
Agreement.
12.9.2 SUBCONTRACTORS. If the P.A. carries out any of the
duties of this Agreement with a value of Ten Thousand Dollars ($10,000) or more
over a twelve (12) month period through a subcontract with a related
organization or person, such subcontract must be approved by the Company and
must contain a clause similar to that set forth in Section 12.9.1 above.
12.10 NO DISCRIMINATION. Each Party agrees that, in the performance of
this Agreement, services will be provided without discrimination toward any
patients, employees, or other persons regardless of their race, creed, color or
ethnic background. Both the Company and P.A. are equal opportunity employers.
All Parties shall comply with all requirements and provisions of the Civil
Rights Act of 1964, 42 U.S.C.A. Section 2000 ET SEQ. and other applicable
federal and state law.
12.11 RECOVERY OF LITIGATION COSTS. Subject to Articles 7 and 8 of this
Agreement, if any legal action or other proceeding is brought for the
enforcement of this Agreement, or because of an alleged dispute, breach,
default, or misrepresentation in connection with any of the provisions of this
Agreement, the successful or prevailing party or parties shall be entitled to
recover reasonable attorneys fees and other costs incurred in that action or
proceeding, in addition to any other relief to which it or they may be entitled.
13
<PAGE>
12.12 CONFIDENTIALITY. This Agreement and its terms and provisions
shall be kept confidential and shall not be disclosed to any other party, nor
shall this Agreement or any part thereof be reproduced or summarized, except to
the extent as required by law.
12.13 BINDING AGREEMENT. All of the terms and provisions of this
Agreement shall be binding upon, inure to the benefit of and be enforceable by
each of the Parties hereto, their respective legal representatives and their
permitted successors and assigns.
IN WITNESS WHEREOF the Parties hereto have executed this Agreement as
of the day and year first above written.
VINELAND DIALYSIS PROFESSIONALS, LLC
By: /s/ DAVID BLECKER, M.D.
-----------------------------------------
Name: DAVID BLECKER, M.D.
Title: President
DCA OF VINELAND, LLC
By: /s/ DIALYSIS CORPORATION OF AMERICA
-----------------------------------------
Member: DIALYSIS CORPORATION OF AMERICA
Name: BART PELSTRING
Title: President
14
<PAGE>
EXHIBIT 2.3.1
LITIGATION AND PROFESSIONAL DISCIPLINE
15
<PAGE>
EXHIBIT 2.3.4
MEDICAL DIRECTOR
I, David Blecker, M.D., Medical Director
of DCA of Vineland, LLC
================================================================================
In order to induce the Company to execute this Agreement, to appoint the
undersigned as Medical Director and to permit the undersigned to assist in
providing Dialysis Treatments and Services; in consideration of the amounts to
be paid as provided in this Agreement to P.A.; and intending to be legally bound
hereby, the undersigned agrees to be bound personally by the Agreement,
including the restrictions set forth in Article 7 of this Agreement.
Date:---------------------, 1999 /s/ DAVID BLECKER
-----------------------------------
DAVID BLECKER, M.D.
ACKNOWLEDGED and AGREED
this 13 day of SEPT., 1999
/s/ STEPHEN W. EVERETT
- ------------------------------
By:
--------------------------
16
<PAGE>
EXHIBIT 4.1
COMPENSATION
For P.A.'s services under this Medical Director Agreement, the Company
will pay the P.A. Thirty Five Thousand and 00/100 ($35,000.00) Dollars per
Agreement Year; or Two Thousand Nine Hundred Sixteen and 67/100 ($2,916.67)
Dollars per month.
The P.A.'s Compensation shall be renegotiated in good faith on or about
the end of each Agreement Year and shall be competitive with the national
standard in the industry. Failure to reach an acceptable renegotiated
Compensation shall not be deemed a breach of nor a basis for termination of this
Medical Director Agreement.
17
<PAGE>
EXHIBIT 7.1.2
EXCLUSIONS FROM RESTRICTED ACTIVITY
1. David Blecker, M.D., as Medical Director of the dialysis unit ("Unit")
at Kessler Memorial Hospital ("KMH").
2. Should KMH offer to P.A., Dr. Blecker or any of their Affiliates
(collectively "P.A.") all or a percent of its Unit, P.A. shall be entitled to
purchase such interest in the Unit, provided P.A. uses its best efforts to
obtain for Dialysis Corporation of America, the parent of the Company ("DCA") an
equal percentage ownership interest in the KMH Unit as may be offered to the
P.A. If DCA declines any such interest or KMH declines to sell any ownership
interest in the Unit to DCA, then P.A. is entitled to acquire the entire
ownership interest in the Unit as offered.
18
<PAGE>
EXHIBIT 7.1.3
Facilities Excluded From Restricted Area:
See Exhibit 7.1.2
MANAGEMENT SERVICES AGREEMENT
This Management Services Agreement ("Agreement") is made and entered
into as of APRIL 30, 1999 by and between DIALYSIS CORPORATION OF AMERICA, a
Florida corporation ("Manager") and DCA OF VINELAND, LLC, a New Jersey limited
liability company ("Company").
WHEREAS, the Company has been established to construct and develop a
hemodialysis outpatient center ("Facility") to provide all levels of outpatient
dialysis care, including chronic maintenance dialysis, home treatment through
hemodialysis or peritoneal dialysis, inpatient dialysis and related services to
hospitals, nursing homes, managed care facilities, and similar institutions,
laboratory, nutritional and pharmaceutical services, and all other necessary
services to dialysis patients ("Business");
WHEREAS, Manager has experience in providing and is ready, willing and
able to provide administrative and management services to the Company in
connection with the Business ("Management Services" as further defined below).
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained in this Agreement and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties, intending
to be legally bound, agree as follows:
1. SCOPE OF THE AGREEMENT.
1.1 Generally. Throughout the Term (defined in Section 8) of
this Agreement, the Manager shall have responsibility for the general management
and administration of the day-to-day and all aspects of the Business of the
Company ("Management Services"). The Management Services shall include providing
the following:
(a) coordination in procuring capital equipment and
the financing thereof with respect to the Facility and the Business;
(b) annual capital and operating budgets;
(c) coordination of advertising, promotional, public
relations and other marketing of the services performed at the Facility and by
the Business;
(d) adopting the fee schedule for and approval of
ancillary services rendered by the Business;
(e) decisions regarding the establishment or
maintenance of relationships with institutional health care providers and payors
and approval of managed care contracts;
(f) developing long-term strategic planning
objectives;
(g) assistance in obtaining loans, leases and other
financing for the benefit of the Company;
<PAGE>
(h) financial management, including causing annual
financial statements to be prepared for the Company by a "Big Five" or
regionally recognized certified public accounting firm selected by Manager;
(i) bookkeeping, accounting, data processing and
other computer based information services;
(j) maintenance of medical records;
(k) materials management, including purchasing and
stocking of office and medical supplies and, if and as necessary,
pharmaceuticals, and maintenance of equipment and facilities;
(l) administration of or causing to be administered
any welfare, benefit or insurance plan or arrangement of the Business;
(m) human resources management, including
recruitment, hiring, training, supervising, monitoring, disciplining and
terminating of non-physician personnel necessary for the Business;
(n) billing and collection, accounts receivable and
accounts payable processing; see Section 3, below;
(o) utilization, cost and quality management systems;
(p) evaluating, negotiating and administering, on
behalf of the Company, multi-employer welfare trusts, third party administrators
and other third parties, including third party payors, managed health care
entities, institutional health care entities, institutional health care
providers and vendors;
(q) coordination in obtaining malpractice and other
agreed upon general and professional liability insurance coverages as required
by the Business and coverage as may be required by law;
(r) developing, implementing, and supporting relevant
policies, protocols and clinical practice guidelines for the Business;
(s) arranging for necessary legal services except
with respect to any legal dispute between the Company and the Manager; and
(t) performing credentialing support services such as
application processing and information verification.
Management Services do not include diagnostic, therapeutic, Dialysis
Treatments and related professional services as more particularly set forth in
the Medical Director Agreement ("MD Agreement," Exhibit A attached) with respect
to Dialysis Treatments as defined in the MD Agreement to be provided by the
Company.
No provision of this Agreement is intended nor shall it be construed to
permit the Manager to affect, interfere with, or influence the
professional/medical judgment of any physician or member of the professional
staff providing Dialysis Treatments or other Professional Services at or for the
Company. To
2
<PAGE>
the extent that any act or service required or permitted to the Manger by any
provision of this Agreement may be construed or deemed to constitute the
practice of medicine, the ownership or control of a medical practice or the
operation of a medical or healthcare facility or diagnostic and treatment
center, such provision shall be void ab initio, and the performance of such act
or service by the Manager shall be deemed waived by the Company.
1.2 LICENSE. In order to facilitate the performance of the
Management Services, the Company grants to the Manager an exclusive, irrevocable
license to use any and all of the Company's assets, whether tangible or
intangible, used in the Business or at the Facility, and irrevocably assigns to
the Manager all Net Revenues (as defined in Section 6.2) of the Company for the
Term (as defined in Section 7) of this Agreement, in both cases solely for the
purpose of carrying out the Management Services under the provisions of this
Agreement.
1.3 APPLICABLE LAw. The Manager shall use its best efforts to
comply with all applicable federal and state laws, statutes, rules and
regulations, including without limitation those relating to Medicare and
Medicaid reimbursement and any other applicable governmental rules or the
guidelines governing the standards for administering a dialysis business.
2. DUTIES AND RESPONSIBILITIES OF THE COMPANY.
2.1 COMPLETION OF FACILITy. The Company shall complete
construction and development of the Facility and shall be responsible for all
necessary improvements to the space occupied by the Facility for the efficient
operation of a FIFTEEN (15) station hemodialysis outpatient Facility, all in
compliance with applicable building codes, zoning requirements, and other
governmental (federal, state and local) agencies', bureaus' and commissions'
regulations, as of the completion date.
2.2 CONSTRUCTION FINANCING. The Company shall be responsible
for all costs necessary to complete the Facility and any improvements in
accordance with Section 2.1 and to obtain licensing and a certificate of
occupancy.
2.3 LICENSING. The Company shall obtain all permits,
authority, Medicare provider numbers, consents and licenses, including, without
limitation, zoning approvals, variances and use or occupancy permits necessary
to conduct the Business at the Facility.
3. BILLING AND COLLECTION. The Manager shall, on behalf of the Company,
accomplish all the billing and collection activities required in connection with
the Business, whether for the Facility, homecare or inpatient services. The
Company hereby appoints the Manager for the Term of this Agreement to be its
true and lawful attorney-in-fact to take the following actions and for the
following purposes for and on behalf of and in the name of the Company:
(a) bill and collect all charges and reimbursements
for the Business;
(b) take possession of and endorse any and all
instruments received as payment for services from the Business and for accounts
receivable from the Business;
(c) deposit all collections directly into the Company
Account (as defined in Section 6.3) and make withdrawals from such Company
Account in accordance with this Agreement; and
(d) initiate the institution of legal proceedings to
collect any accounts and monies owed to the Company, and to enforce the rights
of the Company as creditor in connection with the
3
<PAGE>
Business, and to contest adjustments and denials by governmental agencies or
their fiscal intermediaries as third-party payors.
The Manager shall use its best efforts to (a) issue bills for all
services of the Business within thirty (30) days of the date services are
rendered and (b) collect for all such services as promptly as may be reasonably
practicable.
4. PAYMENT OF EXPENSES AND COSTS. The Manager shall pay all expenses,
including, without limitation, obligations under the Facility lease (Exhibit B
attached), fees as required in the MD Agreement (Exhibit A attached), the
Management Fee (as defined below), employee wages and benefits, including
vacation pay, employer and employee contributions to a 401(k) or other
retirement plan for the benefit of the Company employees, sick pay, health care
expenses, income taxes, unemployment insurance, social security, or any other
withholding pursuant to any applicable law or government requirement, the
Company's employees' professional dues, claims and obligations associated with
and on behalf of the Business (collectively "Operating Expenses") as they become
due from the Net Revenues of the Company, and the Manager may use any amounts
deposited in the Company Account or as transferred to the Manager Account (as
defined in Section 6.3) to pay amounts due hereunder. Notwithstanding anything
in this Agreement to the contrary, the Manager has no obligation to make any
payments for or on behalf of the Company from its or other sources or resources
except from the Net Revenues of the Company; although the Manager may, but is
not obligated to, provide funding, financing, loans, advances and guarantees to,
for and on behalf of the Company.
5. USE OF FACILITIES. The Company shall make the premises of the
Facility available to the Manager and its employees to the extent necessary to
perform the Management Services and will not interfere with the Manager's use of
such premises, provided said use does not interfere with the Business.
6. MANAGEMENT FEE.
6.1 COMPENSATION. In consideration of the Management Services,
the Company agrees to pay the Manager, to be calculated monthly in arrears, a
management fee ("Management Fee") equal to eleven (11%)percent of Net Revenues
(as defined in Section 6.2) up to One Million ($1,000,000) Dollars; nine (9%)
percent of Net Revenues in excess of One Million ($1,000,000) Dollars up to Two
Million ($2,000,000) Dollars; and six (6%) percent of Net Revenues in excess of
Two Million ($2,000,000) Dollars. The Manager shall be entitled to withdraw from
the Company Account or the Manager Account amounts necessary to pay the
Operating Expenses (defined in Section 4).
6.2 NET REVENUES. Net Revenues shall be determined in
accordance with generally accepted accounting principles and shall mean all
amounts billed by the Manager for services rendered by the Business and the
Company, less contractual adjustments and administrative allowances and less
appropriate allowances for bad debts.
6.3 COMPANY ACCOUNT. The Company shall establish and control a
bank account at a bank in _______, __________, or other location to be mutually
agreed upon by the parties ("Bank") acceptable to the Manager ("Company
Account"). In that connection and throughout the time the Manager is providing
Management Services, the Company hereby appoints the Manager as the Company's
true and lawful agent and attorney-in-fact, and grants the Manager a special
limited power of attorney, and the Manager hereby accepts such special, limited
power of attorney and appointment, to deposit in the Company Account all funds,
fees, and revenues generated by the Company and the Business and collectible by
the Manager. The Company shall execute any and all additional documents required
by the Bank where the Company Account is held to effectuate the power of
attorney granted herein. The Company also agrees to establish the Company
Account with the Bank under terms which
4
<PAGE>
provide that the entire balance of the Company Account at the close of each
working day may be transferred to a bank account of the Manager reasonably
acceptable to the Company ("Manager Account") by means to be designated by the
Manager. The Company shall not revoke such daily transfer to the Manager
Account, other than upon the occurrence of a material default by the Manager
which results in the Company's termination of this Agreement. The Manager shall
pay the Operating Expenses from funds in the Manager Account as required under
the terms of this Agreement.
6.4 LOSSES. In the event the Business incurs a Net Operating
Loss (defined as an excess of Operating Expenses over Net Revenues), the Manager
shall at the Company's request fund all such Net Operating Losses during the
Term of this Agreement, and all accrued Net Operating Losses shall bear interest
at prime plus two percent (2%) per annum from the date funded by the Manager
("Accrued Interest"). The Manager shall be entitled to deduct from any Net
Revenues of the Company the amount of any Net Operating Losses funded by and
owed to the Manager by the Company together with Accrued Interest until paid in
full. Any unpaid Net Operating Losses and Accrued Interest accrued by the date
of termination of this Agreement shall become due and payable upon such
termination.
6.5 ARMS-LENGTH BARGAINING. The Management Fee paid by the
Company to the Manager has been determined by the parties through good faith and
arm's-length bargaining. No amount paid hereunder is intended to be, nor shall
it be construed to be, an inducement or payment for referral of, or for
recommending referral of, patients by the Company to the Manager (or to any
Manager affiliate) or by the Manager (or by any Manager affiliate) to the
Company. In addition, the Management Fee does not include any discount, rebate,
kickback, or other reduction in charges, and the Management Fee is not intended
to be, nor shall it be construed to be, an inducement or payment for referral,
or recommendation of referral, of patients by the Company to the Manager (or to
any Manager affiliate) or by the Manager (or by any Manager affiliate) to the
Company.
7. TERM.
7.1 TERM. The Term of this Agreement shall be ten (10) years
commencing on the first date on which the Facility receives patients for
treatment (the "Commencement Date") and ending on the tenth (10th) anniversary
of the Commencement Date (the "Term"), unless earlier terminated pursuant to
Section 7.2.
7.2 TERMINATION BY EITHER PARTY.
7.2.1 BREACH. Either party may terminate this
Agreement if the other party breaches this Agreement and such breach is not
cured to the reasonable satisfaction of the nonbreaching party within sixty (60)
days after the receipt of written notice of the default (the "Default Notice"),
or in the case of a breach which cannot be cured within such time period, the
breaching party has not made a good faith effort to attempt to cure such default
within such time period.
72.2 BANKRUPTCY OR CESSATION OF BUSINESs. Either
party may terminate this Agreement immediately upon the occurrence of any of the
following events with regard to the other party:
(a) the making of a general assignment for
the benefit of creditors;
(b) the filing of a voluntary petition or
the commencement of any proceeding by either party for any relief under any
bankruptcy or insolvency laws, or any laws relating to the relief of debtors,
readjustment of indebtedness, reorganization, composition or extension;
5
<PAGE>
(c) the filing of any involuntary petition
or the commencement of any proceeding by or against either party for any relief
under any bankruptcy or insolvency laws, or any laws relating to the relief of
debtors, readjustment of indebtedness, reorganization, composition or extension,
which such petition or proceeding is not dismissed within sixty (60) days of the
date on which it is filed or commenced; or
(d) suspension of the transaction of the
usual business of either party for a period in excess of sixty (60) days;
7.2.3 AT-WILL TERMINATION. Manager may terminate this
Agreement at any time, with or without cause, by giving the Company not less
than sixty (60) days' prior written notice. The Company may terminate this
Agreement with or without cause, at the end of the initial Term or at the end of
any Renewal Term by giving the Manager not less than ninety (90) days' prior
written notice of its intent to terminate the Agreement at the end of such Term.
7.2.4 IMMEDIATE TERMINATION BY MANAGER. The Manager
may terminate this Agreement immediately upon written notice to the Company in
the event of termination or breach (after any cure period) by the Company for
any reason of any written agreement between the Manager and the Company.
7.2.5 TERMINATION UPON MUTUAL AGREEMENT. The parties
may terminate this Agreement at any time upon execution of a writing signed by
all parties.
7.3 EFFECT OF TERMINATIOn. Upon termination or expiration of
this Agreement for any reason:
(a) the Manager shall have the right to obtain and
retain any amounts owed to Manager under Section 6 hereof as of the date of such
termination or expiration;
(b) the Company shall return to the Manager any and
all property of the Manager which may be in the Company's possession or under
the Company's control;
(c) the Manager shall return to the Company any and
all property of the Company which may be in the possession or control of the
Manager including all records relating to the Business and the provision of
healthcare through the Business, including medical records, corporate, personnel
and financial records maintained for the Business and any and all information
concerning the patients of the Company; provided that Manager shall be entitled
to retain a copy of such records and information to complete billing and
collection functions authorized by this Agreement, to comply with audit and
investigations by third party payors, or as necessary for the benefit of the
Company, or as may be required by law.
8. BOOKS AND RECORDS.
8.1 OWNERSHIP OF RECORDS. All business records and information
relating exclusively to the business and activities of either party shall be the
property of that party, irrespective of identity of the party responsible for
producing or maintaining such records and information.
8.2 RECORDS. During the Term of this Agreement, the Manager
shall keep correct and complete records of accounts and financial transactions
of the Company and the Business and the Company shall have access to such
records at all times.
6
<PAGE>
8.3 MANAGER'S PROPRIETARY RECORDS. The Company hereby
recognizes and acknowledges that all records, files, reports, protocols,
policies, manuals, databases, processes, procedures, computer systems, materials
and other documents used by the Manager (or by any Manager affiliate) in
rendering the Management Services, or relating to the operations of the Manager
(or of any Manager affiliate), belong to and shall remain the property of the
Manager, and constitute proprietary information and trade secrets that are
valuable, special, and unique assets of the Manager's business. The Company
shall not, and shall ensure that the P.A. and each of its physicians shall not,
during or after the Term of this Agreement, disclose any proprietary information
or trade secrets of the Manager (or of any Manager affiliate) to any other firm,
person, corporation, association, or other entity for any reason or purpose
whatsoever, without the written consent of the Manager (or of any Manager
affiliate).
8.4 ACCESS TO BOOKS AND RECORDS. The Manager, on behalf of the
Company, shall make this Agreement and the books, documents, and records of the
Business available to the Secretary of Health and Human Services, to the
Comptroller General, or their duly authorized representatives to the extent
required by section 952 of the Omnibus Budget and Reconciliation Act of 1980 (as
may be amended, updated or superceded). The Manager shall notify the Company in
writing of any such request for access to such documents and shall provide the
Company with copies of such request and all materials described in such request
within ten (10) days after the Manager's receipt of such request.
9. INDEMNIFICATION.
9.1 GENERALLY. Except to the extent paid from the proceeds of
available insurance policies, each party (and it affiliates) agrees to indemnify
and hold harmless the other party (and its affiliates) against any loss, cost,
suit, claim, action, cause of action, damage, obligation, contract, demand,
liability, judgment, verdict, settlement or expense (including reasonable
attorneys' and other constancy fees and court costs) arising out of any act or
omission of the indemnifying party, its employees, agents or affiliates that
occurs in connection with this Agreement
9.2 NOTICE OF CLAIMS, ETC. Upon obtaining knowledge of facts
causing it to believe that it has or will have a claim for indemnification
against the other party under this Agreement such party (the "Indemnified
Party") shall promptly give the other party (the "Indemnifying Party") written
notice of such claim. The Indemnifying Party shall have thirty (30) days from
the receipt of such notice (the "Defense Notice Period") to notify the
Indemnified Party whether or not it desires to defend the Indemnified Party
against such claim or demand. All costs and expenses incurred by the
Indemnifying Party in defending such claim or demand shall be a liability of,
and shall be paid by, the Indemnifying Party. In the event that the Indemnifying
Party notifies the Indemnified Party during the Defense Notice Period that it
desires to defend the Indemnified Party against such claim or demand then,
except as hereinafter provided, the Indemnifying Party shall have the right to
defend the Indemnified Party by appropriate proceedings using legal counsel
reasonably satisfactory to the Indemnified Party. Notwithstanding the foregoing,
the Indemnifying Party shall not, without the prior written consent of the
Indemnified Party, settle, compromise or offer to settle or compromise any such
claim or demand on a basis that would result in the imposition of a consent
order, injunction, decree or agreement that would restrict or affect the future
activity or conduct of the Indemnified Party. The Indemnified Party may
participate in, but not control, any such defense or settlement at its sole cost
and expense. The Indemnified Party shall fully cooperate with the Indemnifying
Party and the Indemnifying Party shall cooperate fully with the Indemnified
Party in the reasonable conduct of any claim contest, action, legal proceeding,
negotiation or settlement governed by this Section 9.2. Upon receiving notice
required by this Section 9.2, if the Indemnifying Party does not elect to
participate in contesting or settling the claim, the Indemnifying Party shall be
estopped from challenging the reasonableness of any contest or settlement of the
claim undertaken by the Indemnified Party.
7
<PAGE>
9.3 OFFSET. The Manager is hereby authorized upon written
notice to the Company to offset or apply any funds of the Company which the
Manager holds from time to time or which the Manager owes to the Company against
or to any amounts owed by the Company to the Manager under this Agreement;
provided, however, if within ten (10) days of such written notice the Company
objects thereto, such funds shall be placed with an escrow agent pursuant to a
mutually acceptable escrow agreement until any dispute with respect thereto is
finally resolved through binding arbitration.
10. MISCELLANEOUS.
10.1 ARBITRATION. Any disputes arising under this Agreement
shall be determined by arbitration in Cumberland County, the State of New Jersey
in accordance with the rules of the American Arbitration Association
("Association") then in effect, by a single arbitrator selected by mutual
agreement of the parties or, if the parties are unable to agree on an
arbitrator, by the Association; provided that this Section 10.1 shall not
restrict the right of either party to institute a legal proceeding to enable
such party to obtain temporary injunctive relief during the pendency of any such
arbitration. A determination of the dispute by the arbitrator shall be final and
binding on the parties to the extent permitted by law. The cost of the
arbitration, including attorneys' or other consultancy fees, shall be borne by
the non-prevailing party.
10.2 STATUS OF PARTIES. In the performance of all work, duties
and obligations under this Agreement, it is mutually understood and agreed that
each party is at all times acting and performing as an independent contractor
with respect to the other and that no relationship of partnership, joint venture
or employment is created by this Agreement. Each party shall be solely
responsible for and shall comply with all state and federal law pertaining to
employment taxes, income withholding, unemployment compensation contribution and
other employment related statutes applicable to that party, provided that the
Manager shall be responsible for administering and taking all reasonable steps
necessary or appropriate for the performance of such items of the Company.
10.3 FORCE MAJEURE. Neither party shall be deemed to be in
default of this Agreement if such party is prevented from performing any
obligation hereunder for any reason beyond its control, including but not
limited to, Acts of G-d, war, civil commotion, fire, flood or casualty, labor
difficulties, shortages of or inability to obtain labor, materials or equipment,
governmental regulations or restrictions, or unusually severe weather. In any
such case, the parties agree to negotiate in good faith with the goal of
preserving this Agreement and the respective rights and obligations of the
parties hereunder, to the extent reasonably practicable. It is agreed that for
purposes of this Agreement financial inability shall not be deemed to be a
matter beyond a party's reasonable control.
10.4 NOTICES. Any notice, demand, approval, consent or other
communication to be given hereunder by either party to the other shall be deemed
to be received by the intended recipient (a) when delivered personally, (b) the
day following delivery to a nationally recognized overnight courier service with
proof of delivery, (c) by facsimile or e-mail transmission provided such is
substantiated by personal or mail delivery, or (d) three (3) days after mailing
by certified mail, postage prepaid with return receipt requested, in each case
addressed to the parties as set forth below:
If to the Company: DCA of Vineland, LLC
Attn: Steve Everett, Vice President
8
<PAGE>
If to the Manager: Dialysis Corporation of America
27 Miller Street
Lemoyne, PA 17043
Attn: Bart Pelstring, President
Any party may change the address for notice by notifying the other party, in
writing, of the new address.
10.5 ENTIRE AGREEMENT. This Agreement supersedes any and all
other agreements, either oral or in writing, between the parties hereto with
respect to the subject matter of this Agreement. This Agreement may not be
changed orally, and may only be amended by an agreement in writing signed by
both parties, which shall be attached hereto.
10.6 NO RIGHTS IN THIRD PARTIES. This Agreement is not
intended to, nor shall it be construed to, create any rights in any third
parties, including the P.A., any physicians employed or engaged by the Company
or the P.A. in connection with the Business.
10.7 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of New Jersey.
10.8 SEVERABILITY. If any provision of this Agreement shall be
held by a court or administrative agency of competent jurisdiction to be
contrary to law, or in a written opinion to the Manager by legal counsel
knowledgeable in healthcare matters retained by the Manager, that provision will
be enforced to the maximum extent permissible, and the remaining provisions of
this Agreement will remain in full force and effect, unless to do so would
result in either party not receiving the benefits of its bargain.
10.9 RIGHTS UNAFFECTED. No amendment, supplement or
termination of this Agreement shall affect or impair any rights or obligations
that had previously matured under this Agreement.
10.10 SUCCESSORS. This Agreement shall be binding upon and
shall inure to the benefit of the parties, their respective heirs, executors,
administrators and assigns.
10.11 FURTHER ACTIONS. Each of the parties hereto agrees that
it shall hereafter execute and deliver such additional instruments and undertake
such additional acts as may be required or useful to carry out the intent and
purpose of this Agreement and as are not inconsistent with the terms hereof.
10.12 COMPLIANCE WITH LAW.
10.12.1 CHANGE IN LAW. In the event of any material
change in, or interpretation or enforcement of, any federal or state law or
regulation (including state or federal anti-kickback statutes and Medicare or
Medicaid reimbursement principles) that would make either the Management Fee or
this Agreement unlawful, or if performance by a party of any duties under this
Agreement is deemed illegal by any court or administrative agency or in a formal
opinion rendered to either party by outside legal counsel of national standing,
the affected party shall have the right to require that the other party
renegotiate the affected terms of this Agreement with the goal of placing the
parties in as similar a position as possible to their respective positions in
this Agreement. To the maximum extent possible, any such amendment shall
preserve the underlying economic and financial arrangements between the Company
and the Manager. Unless the parties otherwise mutually agree in writing, such
renegotiated terms shall be effective not later than twenty (20) days after
receipt of written notice of such request for renegotiation. If the parties fail
to reach an agreement within thirty (30) days of the request for renegotiation,
the matter shall be submitted to binding arbitration upon the request of either
party, and
9
<PAGE>
through the arbitration process an equitable modification shall be implemented
based on all of the facts and circumstances or the Agreement will terminate in
accordance with Section 7.3.
10.12.2 COMPLIANCE WITH LAW. The parties shall (a)
cooperate with one another in the fulfillment of their respective obligations
under this Agreement, (b) comply with the requirements of law and with all
ordinances, statutes, regulations, directives, orders, or other lawful
enactments or pronouncements of any federal, state, municipal, local or other
lawful authority applicable to the Business, and (c) comply with the
requirements of any insurance company insuring the Facility or the parties
against liability for accident or injury in or upon the premises in which the
Facility is located.
10.13 NON-ASSIGNMENT. The Company may not assign this
Agreement except with the prior written approval of the Manager. The Manager may
assign its rights hereunder to any person that is an affiliate of the Manager
and to any lending institution, for security purposes or as collateral, from
which the Manager obtains financing or to any purchaser of the Manager or of
substantially all of the assets of the Manager, or to any person with which the
Manager may merge or consolidate.
10.14 COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall constitute an original Agreement but all
of which together shall constitute one and the same instrument.
10.15 ATTORNEYS' FEES. If legal action is commenced by either
party to enforce or defend its rights under this Agreement, the prevailing party
in such action shall be entitled to recover its costs and reasonable attorneys'
fees in addition to any other relief granted.
10.16. CONFIDENTIALITY. Except for disclosure to its
attorneys, accountants, bankers, underwriters or lenders, or as necessary or
desirable for conduct of business, neither party hereto shall disseminate or
release to any third party any information regarding any provision of this
Agreement, or any financial information regarding the other (past, present or
future) that was obtained by the other in the course of negotiation of this
Agreement or in the course of the performance of this Agreement, without the
other party's written approval; provided, however, the foregoing shall not apply
to information which (i) is generally available to the public other than as a
result of a breach of any confidentiality provisions, (ii) becomes available on
a non-confidential basis from a source other than the other party, or its
affiliates or agents, which source was not itself bound by a confidentiality
agreement, or (iii) which is required to be disclosed by law, including
securities laws, or pursuant to court order.
10.17 REMEDIES CUMULATIVE; SURVIVABILITY. Except as otherwise
stated in the Agreement, no remedy set forth in this Agreement or otherwise
conferred upon or reserved to any party shall be considered exclusive of any
other remedy available to any party, but the same shall be distinct, separate
and cumulative and may be exercised from time to time as often as occasion may
arise or as may be deemed expedient. Pursuit of any remedy set forth in this
Agreement shall not preclude pursuit of any other remedy provided in this
Agreement, or constitute a waiver of any amount due from a defaulting party
under this Agreement or of any damages accruing by reason of the violation of
any of its terms, provisions and covenants. No waiver of any violation shall be
deemed or construed to constitute a waiver of any other violation or breach of
any of the terms, provisions and covenants contained in this Agreement, and
forbearance to enforce one or more of the remedies provided on an event of
default shall not be deemed or construed to constitute a waiver of such default
or of any other remedy provided for in this Agreement. The termination of this
Agreement shall not affect the remedies and rights of a party hereunder with
respect to a breach of this Agreement occurring on or before such termination.
10.18 LANGUAGE CONSTRUCTION. The language in all parts of this
Agreement shall be construed, in all cases, according to its fair meaning, and
not for or against either party hereto. The parties acknowledge that each party
10
<PAGE>
and its counsel have reviewed and revised this Agreement and that the normal
rule of construction to the effect that any ambiguities are to be resolved
against the drafting party shall not be employed in the interpretation of this
Agreement.
10.19 USE OF CERTAIN TERMS. The definitions and terms used in
this Agreement apply equally to both the singular and the plural; any provision
shall include the corresponding masculine, feminine and neuter; the words
"include" and "including" shall be deemed to be followed by the phrase "without
limitation"; the terms "hereof" and "herein" shall refer to the particular
document in which such term appears.
10.20 HEADINGS. The article and section headings used in this
Agreement are for purposes of convenience only. They shall not be construed to
limit or extend the meaning of any part of this Agreement.
10.21 AUTHORITY. Any person signing this Agreement on behalf
of any entity hereby represents and warrants in its individual capacity that it
has full authority to do so on behalf of such entity.
IN WITNESS WHEREOF, the parties have caused their authorized
representatives to execute this Agreement as of the date first above written.
DCA OF VINELAND, LLC,
a New Jersey limited liability company ("Company")
/s/ STEPHEN W. EVERETT
-------------------------------------------
By: STEPHEN W. EVERETT
Its: Vice President
DIALYSIS CORPORATION OF AMERICA,
a Florida corporation ("Manager")
/s/ BART PELSTRING
-------------------------------------------
By: BART PELSTRING
Its: President
Reviewed, acknowledged and accepted:
VINELAND DIALYSIS PROFESSIONALS, LLC
/s/ DAVID BLECKER
- ------------------------------------
By: DAVID BLECKER, M.D.
Its: President
11
AMENDMENT NO. 1 TO MANAGEMENT SERVICES AGREEMENT
The Management Services Agreement made and entered into by and between
DIALYSIS CORPORATION OF AMERICA, a Florida corporation ("Manager") and DCA OF
VINELAND, LLC, a New Jersey limited liability company ("Company") dated April
30, 1999 (the "Agreement"), is hereby amended in the following fashion:
Section 3(c) is hereby amended to read as follows:
3.(c) deposit all collections directly into the Manager
Account (as defined in Section 6.3) and make withdrawals from such
Manager Account in accordance with this Agreement; and
Section 4 is hereby amended by deleting the phrase "Company Account or
as transferred to the" in lines 9 and 10 and otherwise will remain the same.
Section 6.1 is hereby amended by deleting the phrase "Company Account
or the" in line 6 and otherwise will remain the same.
Section 6.3 is hereby amended to read as follows:
6.3 COMPANY ACCOUNT. The Company shall establish and control a
bank account at a bank in Harrisburg, Pennsylvania, or other location
to be mutually agreed upon by the parties ("Bank") acceptable to the
Manager ("Company Account"). Capital contributions to the Company
("Contributions"), Manager Distributions as defined in Section 6.5, and
any distributions, allocations of profits and losses, dissolutions and
liquidations (collectively "Distributions") shall go directly into or
flow from the Company Account. In connection with Contributions and
Distributions, and throughout the time the Manager is providing
Management Services, the Company hereby appoints the Manager as the
Company's true and lawful agent and attorney-in-fact, and grants the
Manager a special limited power of attorney, and the Manager hereby
accepts such special, limited power of attorney and appointment, to
deposit such Contributions in and pay out such Distributions from the
Company Account. The Company shall execute any and all additional
documents required by the Bank where the Company Account is held to
effectuate the power of attorney granted herein. The Company also
agrees to appoint the Manager as the Company's true and lawful agent
and attorney-in-fact, and grants the Manager a special limited power of
attorney, and the Manager hereby accepts such special limited power of
attorney and appointment to collect and deposit all funds, fees and
revenues generated by the Company and the Business into a bank account
of the Manager ("Manager Account") by means to be designated by the
Manager. The Company shall not revoke such special limited power of
attorney for the Manager to collect and deposit such funds, fees and
revenues to the Manager Account, other than upon the occurrence of a
material default by the Manager which results in the Company's
<PAGE>
termination of this Agreement. The Manager shall pay the Operating
Expenses from funds in the Manager Account as required under the terms
of this Agreement.
Section 6.5 is hereby amended to become Section 6.6, with a new Section
6.5 added to read as follows:
6.5 MANAGEMENT DISTRIBUTIONS. Subject to the provisions of the
Company's Operating Agreement and to any financing arrangement or
facility to which the Manager is or may become a party, the Manager
shall make quarterly distributions ("Manager's Distributions" as more
particularly defined in this Section 6.5) to the Company Account of
cash, if any, in and from the Manager Account, which represents only
those Net Revenues generated by the Company and not from any other
source, less Operating Expenses and those additional amounts as the
Manager may determine are necessary and reasonable reserves for the
payment of Operating Expenses, debt payments, capital improvements and
other purposes for the operation of the Facility and Business
("Reasonable Reserves"). Absent such excess cash from Net Revenues less
the Operating Expenses and amounts for Reasonable Revenues, or if such
excess cash is less than $5,000, the Manager will not be obligated to
make a Manager's Distribution for that quarter, provided, excess cash
will be deemed cumulative and attributed to the next succeeding
quarterly computation of the Manager's Distributions.
All other terms and provisions of the Management Services Agreement
will continue in full force and effect except as otherwise modified herein.
DCA OF VINELAND, LLC
a New Jersey limited liability company ("Company")
/s/ BART PELSTRING
-------------------------------------------
By: BART PELSTRING
Its: President
DIALYSIS CORPORATION OF AMERICA
a Florida corporation ("Manager")
/s/ STEPHEN W. EVERETT
-------------------------------------------
By: STEPHEN W. EVERETT
Its: Vice President
Reviewed, acknowledged and accepted:
VINELAND DIALYSIS PROFESSIONALS, L.L.C.
/s/ DAVID BLECKER
- -------------------------------------
By: DAVID BLECKER, M.D.
Its: President
2
MANAGEMENT SERVICES AGREEMENT
This Management Services Agreement ("Agreement") is made and entered
into as of January 1, 2000 by and between DCA of Vineland, LLC, a New Jersey
limited liability company ("Manager") and DCA Medical Services, Inc., a Florida
corporation ("Company").
WHEREAS, the Manager runs a hemodialysis outpatient center which
provides all levels of outpatient dialysis care ("Facility");
WHEREAS, the Company is an established provider of home dialysis
equipment and supplies ("Home Services") which needs various administrative,
clinical and management services in order to conduct its business in a more
efficient manner ("Business").
WHEREAS, certain dialysis patients of the Manager receive Home Services
from the Company ("Common Patients");
WHEREAS, Manager has experience in providing and is ready, willing and
able to provide administrative, clinical and management services to the Company
in connection with the Common Patients of the Company and the Manager
("Management Services") with respect to Home Services;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained in this Agreement and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties, intending
to be legally bound, agree as follows:
1. SCOPE OF THE AGREEMENT.
1.1 GENERALLY. The Management Services shall include providing
the Company with bookkeeping, accounting, data processing, collection of
accounts receivable, and other computer based information services, maintenance
of medical records, and related Management Services in connection with the
Common Patients of the Company and the Manager relating to Home Services.
1.2 LICENSE. In order to facilitate the performance of the
Management Services, the Company grants to the Manager an irrevocable license to
use any and all of the Company's assets used in the Business; provided no
provision of this Agreement is intended nor shall it be construed to permit the
Manager to effect, interfere with, or influence the Method 2 operations of the
Business of the Company; and provided further, to the extent that any act or
service required or provided to the Company by the Manager by any provision of
this Agreement may be construed or deemed to constitute the practice of medicine
or the ownership or control of the Method 2 operations of the Business, such
provision shall be void AB INITIO, and the performance of such act or services
by the Manager shall be deemed waived by the Company.
1.3 APPLICABLE LAW. The Manager shall use its best efforts to
comply with all applicable federal and state laws, statutes, rules and
regulations in performing the Management Services under this Agreement.
<PAGE>
2. MANAGEMENT FEE.
In consideration of the Management Services provided by the Manager,
the Manager's fee shall be the Company's revenues derived from the Common
Patients, excluding the Company's direct costs and expenses associated with the
Common Patients.
3. TERM.
3.1 TERM. The Term of this Agreement shall be for three (3)
years, commencing on the date above, and assuming no breach of this Agreement,
shall be automatically renewable for additional three (3) year Terms, unless
within 120 days of the ending period of the Term or any Renewal Term either of
the parties gives its written notice that it intends not to be bound for an
additional Term.
3.2 TERMINATION BY EITHER PARTY.
3.2.1 BREACH. Either party may terminate this
Agreement if the other party breaches this Agreement and such breach is not
cured to the reasonable satisfaction of the nonbreaching party within sixty (60)
days after the receipt of written notice of the default (the "Default Notice"),
or in the case of a breach which cannot be cured within such time period, the
breaching party has not made a good faith effort to attempt to cure such default
within such time period.
3.2.2 BANKRUPTCY OR CESSATION OF BUSINESS. Either
party may terminate this Agreement immediately upon the occurrence of any of the
following events with regard to the other party:
(a) the making of a general assignment for
the benefit of creditors;
(b) the filing of a voluntary petition or
the commencement of any proceeding by either party for any relief under any
bankruptcy or insolvency laws, or any laws relating to the relief of debtors,
readjustment of indebtedness, reorganization, composition or extension;
(c) the filing of any involuntary petition
or the commencement of any proceeding by or against either party for any relief
under any bankruptcy or insolvency laws, or any laws relating to the relief of
debtors, readjustment of indebtedness, reorganization, composition or extension,
which such petition or proceeding is not dismissed within sixty (60) days of the
date on which it is filed or commenced; or
(d) suspension of the transaction of the
usual business of either party for a period in excess of sixty (60) days.
3.2.3 AT-WILL TERMINATION. Manager may terminate this
Agreement at any time, with or without cause, by giving the Company not less
than sixty (60) days' prior written notice. The Company may terminate this
Agreement with or without cause, at the end of the initial Term by giving the
Manager not less than one hundred twenty (120) days' prior written notice of its
intent to terminate the Agreement at the end of the Term.
3.3 TERMINATION UPON MUTUAL AGREEMENT. The parties may
terminate this Agreement at any time upon execution of a writing signed by all
parties.
3.4 EFFECT OF TERMINATION. Upon termination or expiration of
this Agreement for any reason:
2
<PAGE>
(a) the Manager shall have the right to obtain and
retain any amounts owed to Manager under Section 2 hereof as of the date of such
termination or expiration;
(b) the Company shall return to the Manager any and
all property of the Manager which may be in the Company's possession or under
the Company's control;
(c) the Manager shall return to the Company any and
all property of the Company which may be in the possession or control of the
Manager, including medical records, corporate, personnel and financial records
maintained for the Business and any and all information concerning the Common
Patients; provided that Manager shall be entitled to retain a copy of such
records and information to complete Management Services authorized by this
Agreement, or as necessary for the benefit of the Company, or as may be required
by law.
4. MISCELLANEOUS.
4.1 ENTIRE AGREEMENT. This Agreement supersedes any and all
other agreements, either oral or in writing, between the parties hereto with
respect to the subject matter of this Agreement. This Agreement may not be
changed orally, and may only be amended by an agreement in writing signed by
both parties, which shall be attached hereto.
4.2 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of New Jersey.
4.3 SEVERABILITY. If any provision of this Agreement shall be
held by a court or administrative agency of competent jurisdiction to be
contrary to law, or in a written opinion to the Manager by legal counsel
knowledgeable in healthcare matters retained by the Manager, that provision will
be enforced to the maximum extent permissible, and the remaining provisions of
this Agreement will remain in full force and effect, unless to do so would
result in either party not receiving the benefits of its bargain.
4.4 RIGHTS UNAFFECTED. No amendment, supplement or termination
of this Agreement shall affect or impair any rights or obligations that had
previously matured under this Agreement.
4.5 SUCCESSORS. This Agreement shall be binding upon and shall
inure to the benefit of the parties, their respective heirs, executors,
administrators and assigns.
4.6 FURTHER ACTIONS. Each of the parties hereto agrees that it
shall hereafter execute and deliver such additional instruments and undertake
such additional acts as may be required or useful to carry out the intent and
purpose of this Agreement and as are not inconsistent with the terms hereof.
4.7 COMPLIANCE WITH LAW.
4.7.1 CHANGE IN LAW. In the event of any material
change in, or interpretation or enforcement of, any federal or state law or
regulation (including state or federal anti-kickback statutes and Medicare or
Medicaid reimbursement principles) that would make either the Management Fee or
this Agreement unlawful, or if performance by a party of any duties under this
Agreement is deemed illegal by any court or administrative agency or in a formal
opinion rendered to either party by outside legal counsel of standing, the
affected party shall have the right to require that the other party renegotiate
the affected terms of this Agreement with the goal of placing the parties in as
similar a position as possible to
3
<PAGE>
their respective positions in this Agreement. To the maximum extent possible,
any such amendment shall preserve the underlying economic and financial
arrangements between the Company and the Manager.
4.7.2 COMPLIANCE WITH LAW. The parties shall (a)
cooperate with one another in the fulfillment of their respective obligations
under this Agreement, and (b) comply with the requirements of law and with all
ordinances, statutes, regulations, directives, orders, or other lawful
enactments or pronouncements of any federal, state, municipal, local or other
lawful authority applicable to the Business.
4.8 NON-ASSIGNMENT. The Company may not assign this Agreement
except with the prior written approval of the Manager. The Manager may assign
its rights hereunder to any person that is an affiliate of the Manager and to
any lending institution, for security purposes or as collateral, from which the
Manager obtains financing or to any purchaser of the Manager or of substantially
all of the assets of the Manager, or to any person with which the Manager may
merge or consolidate.
4.9 COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall constitute an original Agreement but all
of which together shall constitute one and the same instrument.
4.10 HEADINGS. The article and section headings used in this
Agreement are for purposes of convenience only. They shall not be construed to
limit or extend the meaning of any part of this Agreement.
4.11 ARBITRATION. Any disputes arising under this Agreement
shall be determined by arbitration in __________ County, the State of New Jersey
in accordance with the rules of the American Arbitration Association
("Association") then in effect, by a single arbitrator selected by mutual
agreement of the parties or, if the parties are unable to agree on an
arbitrator, by the Association; provided that this Section 4.11 shall not
restrict the right of either party to institute a legal proceeding to enable
such party to obtain temporary injunctive relief during the pendency of any such
arbitration. A determination of the dispute by the arbitrator shall be final and
binding on the parties to the extent permitted by law. The cost of the
arbitration, including attorneys' or other consultancy fees, shall be borne by
the non-prevailing party.
4.12 STATUS OF PARTIES. In the performance of all work, duties
and obligations under this Agreement, it is mutually understood and agreed that
each party is at all times acting and performing as an independent contractor
with respect to the other and that no relationship of partnership, joint venture
or employment is created by this Agreement. Each party shall be solely
responsible for and shall comply with all state and federal law pertaining to
employment taxes, income withholding, unemployment compensation contribution and
other employment related statutes applicable to that party.
4.13 FORCE MAJEURE. Neither party shall be deemed to be in
default of this Agreement if such party is prevented from performing any
obligation hereunder for any reason beyond its control, including but not
limited to, Acts of G-d, war, civil commotion, fire, flood or casualty, labor
difficulties, governmental regulations or restrictions, or unusually severe
weather. In any such case, the parties agree to negotiate in good faith with the
goal of preserving this Agreement and the respective rights and obligations of
the parties hereunder, to the extent reasonably practicable. It is agreed that
for purposes of this Agreement financial inability shall not be deemed to be a
matter beyond a party's reasonable control.
4.14 NOTICES. Any notice, demand, approval, consent or other
communication to be given hereunder by either party to the other shall be deemed
to be received by the intended recipient (a) when delivered personally, (b) the
day following delivery to a nationally recognized overnight courier
4
<PAGE>
service with proof of delivery, (c) by facsimile or e-mail transmission provided
such is substantiated by personal or mail delivery, or (d) three (3) days after
mailing by certified mail, postage prepaid with return receipt requested, in
each case addressed to the parties as set forth below:
If to the Company: DCA Medical Services, Inc.
c/o Dialysis Corporation of America
27 Miller Street
Lemoyne, PA 17043
Attn: Stephen Everett, President
If to the Manager: DCA of Vineland, LLC
c/o Lawrence E. Jaffe, Esq., Secretary
777 Terrace Avenue
Hasbrouck Heights, NJ 07604
Any party may change the address for notice by notifying the other party, in
writing, of the new address.
4.15 CONFIDENTIALITY. Except for disclosure to its attorneys,
accountants, bankers, underwriters or lenders, or as necessary or desirable for
conduct of business, neither party hereto shall disseminate or release to any
third party any information regarding any provision of this Agreement, or any
financial information regarding the other (past, present or future) that was
obtained by the other in the course of negotiation of this Agreement or in the
course of the performance of this Agreement, without the other party's written
approval; provided, however, the foregoing shall not apply to information which
(i) is generally available to the public other than as a result of a breach of
any confidentiality provisions, (ii) becomes available on a non-confidential
basis from a source other than the other party, or its affiliates or agents,
which source was not itself bound by a confidentiality agreement, or (iii) which
is required to be disclosed by law, including securities laws, or pursuant to
court order.
4.16 USE OF CERTAIN TERMS. The definitions and terms used in
this Agreement apply equally to both the singular and the plural; any provision
shall include the corresponding masculine, feminine and neuter; the words
"include" and "including" shall be deemed to be followed by the phrase "without
limitation"; the terms "hereof" and "herein" shall refer to the particular
document in which such term appears.
IN WITNESS WHEREOF, the parties have caused their authorized
representatives to execute this Agreement as of the date first above written.
DCA MEDICAL SERVICES, INC.
("Company")
By: /s/ STEPHEN W. EVERETT
------------------------------------
STEPHEN EVERETT, President
DCA OF VINELAND, LLC
("Manager")
By: /s/ STEPHEN W. EVERETT
------------------------------------
DIALYSIS CORPORATION OF AMERICA,
Managing Partner
5
EXHIBIT 21
SUBSIDIARIES
------------
Jurisdiction of Percentage Owned
Subsidiaries Incorporation By Registrant
- ------------ ------------- -------------
DCA Medical Services, Inc. Florida 100%
DCA of SO. GA., LLC Delaware 70%
DCA of Vineland, LLC New Jersey 80%
Dialysis Services of NJ, Inc.-
Manahawkin New Jersey 80%
Dialysis Services of NJ, Inc. -
Toms River* New Jersey 80%
Dialysis Services of PA, Inc. - Carlisle Pennsylvania 80%
Dialysis Services of PA, Inc. - Chambersburg Pennsylvania 80%
Dialysis Services of PA, Inc. - Lemoyne Pennsylvania 100%
Dialysis Services of PA, Inc. - Wellsboro Pennsylvania 100%
Renal Services of Pa., Inc.* Pennsylvania 100%
* inactive.
EXHIBIT 23(i)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statement (Form S-3, No. 33-80877-a) of Dialysis Corporation of America and in
the related Prospectus of our report dated March 22, 1999, with respect to the
consolidated financial statements and schedule of Dialysis Corporation of
America as of and for the two years ended December 31, 1998 included in this
its Annual Report (Form 10-K) for the year ended December 31, 1999.
/s/ ERNST & YOUNG LLP
March 25, 2000
Miami, Florida
EXHIBIT 23(ii)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statement (Form S-3, No. 33-80877-a) of Dialysis Corporation of America and in
the related Prospectus of our report dated March 10, 2000, with respect to the
consolidated financial statements of Dialysis Corporation of America included in
its Annual Report (Form 10-K) for the year ended December 31, 1999, filed with
the Securities and Exchange Commission.
/s/ WISS & COMPANY, LLP
March 29, 2000
Livingston, New Jersey
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,659,390
<SECURITIES> 0
<RECEIVABLES> 779,568
<ALLOWANCES> 0
<INVENTORY> 219,623
<CURRENT-ASSETS> 5,055,942
<PP&E> 5,306,245
<DEPRECIATION> 1,454,190
<TOTAL-ASSETS> 9,035,947
<CURRENT-LIABILITIES> 903,791
<BONDS> 869,985
0
0
<COMMON> 35,463
<OTHER-SE> 7,224,628
<TOTAL-LIABILITY-AND-EQUITY> 9,035,947
<SALES> 5,498,541
<TOTAL-REVENUES> 5,865,571
<CGS> 3,964,258
<TOTAL-COSTS> 3,964,258
<OTHER-EXPENSES> 2,789,529
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 72,605
<INCOME-PRETAX> (960,821)
<INCOME-TAX> (292,462)
<INCOME-CONTINUING> (668,359)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (668,359)
<EPS-BASIC> (.19)
<EPS-DILUTED> (.19)
<FN>
<F1>
Accounts receivable are net of allowance of $237,000 at December 31, 1999.
</FN>
</TABLE>
